"India A Growing International Oil and Gas Player"
INDIA – A GROWING INTERNATIONAL OIL AND GAS PLAYER March 2000 With its one billion inhabitants and limited energy resources, India has no other choice than to resort to international oil and gas markets for its energy supply. It is emerging as a large importer of crude oil for its fast growing products markets and should begin importing LNG within the coming two years as the piped gas option stumbles on political difficulties with its immediate neighbours. In spite of the gradual – sometimes-slow – implementation of reforms and mixed responses of foreign investors, these trends call for a sustained attention from IEA Member Countries policy makers and investors. This is required to understand the international implications of India’s growing energy imports and consumption and to assess the potentials offered by Indian oil and gas markets. 1 Overview 1. India’s total primary energy supply reached 461 mtoe in 1997. India’s energy use is mostly based on fossil fuels. Coal and oil products represent a little more than half of the primary energy supply, with coal accounting for a third of this amount. The share of gas is still limited, but growing quickly (from 2.8% in 1990 to almost 4% in 1997). Energy has to be supplied to India’s one billion inhabitants, more than a third of which live below the poverty line (See Figure 1). Figure 1 India – Total primary energy supply (1997) coal 33% other 44% oil 19% gas 4% 2. At present, there is a sense of new stability arising from a government based on a stronger coalition. The coalition, elected in October 1999, is led by the BJP and is providing positive signals to the industry, re-assuring foreign investors and demonstrating a continuity of the commitment to economic reforms. 3. Economic growth reached 5.9% in the fiscal year 1999-2000 (April-March), led by industry and services. However, the rate decreased from the previous year (98-99: 6.8%). 4. Ups and downs in economic growth demonstrate that infrastructure bottlenecks are yet to disappear. In infrastructure and in energy, the slow implementation of reforms reduces investments and is a drag on economic growth. Unfortunately, the budget that was just tabled in Parliament on 29 February 2000 is not expected to help in boosting the pace of these reforms. There are limited provisions in the new budget for an accelerated divestment programme in public energy firms, or for a substantial reduction in public expenditure, nor is there a large scope for a strong increase in private investment. 5. The public deficit remains high. It is expected to approach a cumulative 9% of GDP in 1999- 2000 (6.5% from the central government and 2.0% from the states). The government reduced the interest rates of public saving funds in January 2000, but there is a risk that this measure will not contribute to reducing public expenditure, because it provides an incentive for the government to borrow more. The high public deficit impedes much needed public investment in infrastructure. It 2 also pushes up interest rates and crowds out private investments. Eventually, it slows down economic growth. Public expenditures on salary and direct subsidies remain the single most important reasons for high public expenditure. They are politically difficult to compress in spite of efforts in this direction. 6. High international oil prices strongly affect India’s oil import bill. Crude oil imports are likely to increase by more than 65% this fiscal year as compared to the last fiscal year. Assuming $20 per barrel for crude and $197 per tonne of petroleum products, the oil import bill is expected to reach $11.5 billion this fiscal year (ending March 2000). Crude oil and petroleum product imports will represent around 22% of all imports this year against 15% last year. This is a similar level to the ones in the mid-1990s. At that time, the high value of oil imports, combined with price subsidies on several petroleum products, forced the state to disburse large quantities of money in the Oil Account, leading to its deficit (see IEA 1999b, 1997). The deficit situation was then reduced, thanks to the international oil price decreases in 1998 and a reduction in petroleum product subsidies (IEA 1999a). High oil prices are also causing the inflation rate to increase slightly to a modest level of 3% in 1999- 2000. Oil 7. In 1996/97, oil and gas represented 22.9% of India’s total primary energy supply (461 mtoe), with oil accounting for 19.1%. 8. India is a net oil importing country. Increases in the international price of oil, and bad monsoons have been two important factors behind the economic crises that India has repeatedly had to face since its independence. India’s oil import dependency is likely to grow if the present trends continue. 9. Consumption surpassed 2 mb/d in 1999. It is growing fast, responding to rapid economic growth, per capita income growth and increased availability of goods and service (e.g.: light vehicles). On average, the final consumption of petroleum products grew at a sustained rate of +6.7% per annum from 1993 to 1999, roughly half a percentage point above average economic growth. In the final consumption of petroleum products high-speed diesel oil accounted for 43.4% of the total in 1997, a high figure compared to other countries, kerosene’s share was almost 12% and LPG was 5.2%. (See Figure 2) Figure 2 India – Final oil products consumption (kb/d) 2200 2000 2129 2008 1800 1859 1785 1600 1723 1601 1400 1444 1200 1348 1000 1993 1994 1995 1996 1997 1998 1999 2000 Note: 2000 is an estimate. 3 10. Although coal and hydroelectricity resource potential are both significant in India, the country is relatively poor in oil and gas. Most Indian oil reserves are located off the West Coast and onshore in the Northeast region. The majority of India’s roughly 4.8 billion barrels in oil reserves are located in the Bombay High, Upper Assam, Cambay, Krisha-Godavari, and Cauvery basins. 11. The offshore Bombay High area is by far India’s largest producing area, with production of 250 kb/d in 1998. Offshore represented 53% of the Indian crude oil production in 1999. India’s average production level for 1999 is estimated at 656 kb/d (33 million tonnes), stagnating from previous years. Our estimate for 2000 is put at 607 kb/d, as no major changes should affect the future trends, considering the maturity of existing Indian oil fields. (See Figure 3) Figure 3 India – Crude oil production (kb/d) 720 694 700 675 680 659 660 656 660 640 620 620 607 600 580 560 1994 1995 1996 1997 1998 1999 2000 Note: 2000 is an estimate. 12. Public sector companies dominate India’s oil and gas sector. The Oil and Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd. (OIL) carry out most oil and gas exploration and production activities in India. Several private companies are also operating in India under production sharing contracts. Pipeline gas transportation is under the responsibility of the Gas Authority of India Ltd. (GAIL). 13. Reforms in the oil sector began to stimulate production in 1991 by opening onshore exploration and production blocks to private and foreign firms via production sharing contracts. The government is also planning a partial privatisation of ONGC, IOC and GAIL and has opened the refining sector to private firms. Imports and marketing of LPG, kerosene, low sulphur heavy fuel and lubricants were also opened to the private sector. 14. In 1996, the second phase of a three-stage reform began. The government planned to withdraw from 1) the refining sector (1996-1998), 2) the upstream sector (1998-2000) and 3) the marketing sector (2000-2002). The second phase includes the dismantling of the Administered Pricing Mechanism (APM) and the implementation of free market-determined pricing mechanism (MDPM) in the oil sector. 15. Prices of petroleum products have seen their subsidies decrease in the past two years, following the implementation of the second phase of reform. The government is committed to its 2002 target, whereby subsidies to the prices of LPG and kerosene, the remaining subsidised petroleum products, should be reduced to 15% and 33.33% of import parities. The government increased the price of kerosene in 1999. The hike in international crude oil prices towards the second part of the year renewed the need for a major increase in the price of kerosene. But the decision has been delayed due to its political sensitivity. (See Table 1) 4 Table 1 India – Energy Subsidies Estimated rate of Potential primary subsidy (% of energy savings reference price)* from removal subsidy (%)** Gasoline 0.0 0.0 Auto diesel 0.0 0.0 LPG 31.6 17.3 Kerosene 52.6 32.9 Light fuel oil 0.0 0.0 Heavy fuel oil 0.0 0.0 Electricity 24.2 0.0 Natural gas 22.5 16.6 Steam coal 13.1 16.5 Coking coal 42.3 24.1 Total 14.2 14.0 (7.2)*** Notes: calculations based on 1998 prices and quantities. *Weighted average. **TPES saved/TPES for the sectors covered in the study. ***Figure in parentheses is calculated using TPES for all sectors and fuels, including those not covered in the study. Source: IEA 1999, World Energy Outlook, Insights 1999, Looking at Energy Subsidies, Chapter 7: India. 16. India is trying to reduce the growth of its dependence on crude oil imports by expanding domestic exploration and production. India’s Ninth Five-Year Plan states that India will run out of oil reserves by 2012, even though by then only 30% of demand will be met by domestic production. Thus the plan emphases the need to make new discoveries to prevent this. Recent experience does not support an optimistic view, as no major new finds have been made in recent years, and analysts consider it likely that most of India’s easily recoverable reserves have been discovered. The accent is now on offshore exploration, in particular deep water exploration. One onshore area which also has shown promise is western Rajasthan. 17. In February 1997, the Government endorsed a New Exploration Licensing Policy (NELP) to provide a framework for private newcomers in oil exploration and to allow public companies to diversify and integrate their operations vertically. It advertised the sale of 48 oil and gas blocks (26 offshore, 10 onshore and 12 deep-sea oil blocks). While the initial response to the 1999 tender was disappointing, with no bids received from the major multinational oil companies, India proceeded with the award of 25 oil exploration blocks in early January 2000. 18. The largest winner in the bidding round was India’s domestic Reliance Industries, in partnership with independent Niko Resources of Canada (12 blocks). British independent Cairn Energy, Russia’s Gazprom, the U.S. firm Mosbacher Energy, and Geopetrol of France were all awarded single blocks in partnership with Indian firms. India’s state-owned Oil and Natural Gas Corporation (ONGC) was awarded eight blocks, three of which it will hold in partnership with other public-sector Indian firms. Production sharing contracts for these blocks should be concluded by this month. 5 19. Low recovery rates from existing fields is a major part of the oil supply problem for India. Recovery rates average only about 30% in currently producing Indian fields, well below the world average. Allowing private and foreign investment in exploration and production could bring in technology that is not currently available to Indian public firms, thereby increasing overall recovery rates. However, the introduction of enhanced oil recovery technology to such oil field as the Bombay High is not envisaged by the government at present. As a result, new investments will only contribute to slowing down the decline in domestic production. 20. In a restructuring of the state-owned oil sector, two of the main firms, India Oil Corporation (IOC) and Oil and Natural Gas Corporation (ONGC), formed a strategic alliance in early 1999 and swapped 10% of their respective shares. As ONGC is an upstream producer and IOC a downstream refining and distribution firm, the stated aim of the alliance is to create an entity which can compete with the major multinational oil firms. Independent Indian analysts, however, have pointed out that the main effect of the transaction was to transfer $1.2 billion from IOC and ONGC to the Indian state treasury, because they were buying each others’ shares from the government. This will decrease the combined firm’s ability to invest in new exploration and infrastructure. 21. A government panel studying the domestic oil sector has recommended that all of the Indian state-owned oil companies be privatised by 2005. A deregulation of the industry, including a relaxation of price controls, is also planned to take place by mid-2002. ExxonMobil, Royal Dutch/Shell, and TotalFina have been reported to be interested in acquiring stakes in the firms to be privatised. 22. In spite of the limited interest demonstrated by large multinational oil companies in offshore development, onshore crude oil production by private sector joint-ventures is growing fast. This segment represented 6.4% of Indian crude oil production in 1997, and reached close to 13% in 1999, at 77 kb/d. 23. In the past decade, India imported large quantities of refined products, lacking the refining capacity to keep up with growing demand. In March 1998, the total annual refining capacity of the 14 refineries in the country was 61.55 mt (1231 b/d). It is expected to grow to more than double to 131 mt by 2002. Already in 1999, construction allowed India to close the gap. At the end of 1999, refining capacity reached 1.86 mb/d, adding 720 kb/d in a year, in some ways far more important 1 than growth than in the crude oil production (See Figure 4) . In late summer 1999, the Indian company Reliance Petroleum’s huge Jamnagar refinery came onstream, with a capacity expected to reach 540 kb/d. It does not have its own retail distribution network, but begun selling its products through three of the state-owned firms. The 120 kb/d expansion of the Mangalore refinery (to 180 kb/d total capacity) came onstream in late 1999, and the 210 kb/d Essar unit (also at Jamnagar) is to become operational this year. Refinery construction has been encouraged by regulatory incentives, in particular a five-year tax holiday for refineries completed by 2003. (See Figure 5) 1 The difference between refining capacity and petroleum product production figures is explained by a capacity slightly over-utilised before 1998 and the opposite in 1999, as new accounted capacity was not yet producing. 6 Figure 4 India- Annual growth rates of crude oil and products production (%) 25 20 15 10 5 0 -5 -10 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 crude oil refinery throughput GDP Figure 5 India – Production of petroleum products (kb/d) 1700 1599.8 1600 1500 1400 1346.6 1304.1 1300 1239.5 1200 1100 1000 1996 1997 1998 1999 24. Another major downstream infrastructure development is the construction of pipelines being undertaken by Petronet India, a company created under an agreement in 1998 among India’s state- owned refineries. The project will add 500 kb/d to India’s current 325 kb/d capacity for the transport of refined products. Pipelines between refineries and major urban centers will replace more expensive rail as the main transportation mode. 25. While retail gasoline sales are still controlled by state firms, several multinationals have entered the Indian lubricants market, which was deregulated five years ago. Over one-third of the market is currently held by multinationals, such as Shell, Elf (Totalfina), Exxon, and Caltex. While these operations are relatively small, they serve to allow the majors to study the Indian market, establish brand recognition, and position themselves for the eventual deregulation of the Indian retail 7 petroleum products sector planned for 2005. Also Malaysia’s Petronas has been reported to be considering teaming with an Indian partner to enter the Indian petroleum products market. 26. The outlook for the oil sector means a growing oil import dependency. Oil represented one third of the TPES (excluding non-commercial energy) in 1999. The IEA expects it to keep this position in the coming two decades. The transport sector should be the main driver behind rising oil consumption. It reflects the expected increase in disposable income and growth in the industrial sector. Another contributing factor is an expected decline in rail traffic in the region at the expense of trucking. Oil share should also grow for the stationary uses. 27. As a result of these expected trends, the limited domestic production and the increase in domestic refining capacity, India will grow as a large crude oil importing country2 (Figure 6 and Figure 7). In 1999, the pattern of Indian imports had already begun shifting towards a larger share of crude. India imported an equivalent of 1.27 mb/d in 1999, out of which 72% was crude oil and 28 petroleum products, compared to a crude oil to products imports ratio of 60:40 in previous five years. Most products were middle distillates (aviation turbine fuel, kerosene, high speed diesel). From 1999 onwards, the imports will be limited to kerosene and LPG due to larger domestic refinery production of other products. (See Figure 8) Figure 6 India –Domestic production outlook, crude and NGLs (kb/d) 800 667 640 615 700 592 571 551 533 600 517 502 488 500 400 300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 crude crude JV NGLs Total 2 EIA expects final oil consumption of petroleum products to reach 3.1 mb/d by 2010 (EIA 2000). 8 Figure 7 India – External oil dependency outlook 90 80 70 60 50 86% 40 77% 62% 30 20 10 0 1996 2010 2020 Figure 8 India – Crude and products trade (kb/d) 1400 1200 1000 800 600 400 200 0 1995 1996 1997 1998 1999 net imports net crude imports net products imports 28. In terms of imports, oil and petroleum products represented around 20% of India’s total imports, in the nineties. 29. Oil dependency increased steadily since 1984, from almost 30% in 1984 to 62% in 1997. It is expected to rise to 77% by 2010 and reach almost 90% in 20203. 30. Currently India’s government does not have plans for strategic reserves. The interest for it is growing, especially from the refining private sector. 3 This would correspond roughly to one and a half time the imports of a country like Germany in 1997 (then the third largest world oil importer.). 9 Figure 9 India – Production of natural gas (bcm) 25 21.2 21.8 19.1 20 17 16 15.9 15 13.9 12.4 10.9 10 8.9 7.5 5 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Gas 31. In 1997, natural gas represented almost 4% of India TPES. However, natural gas experienced the fastest rate of increase of any fuel in the primary energy supply. Its share is expected to more than double by 2020, with an annual rate of growth projected to be around 7.3% over the period. 32. 34% of Indian natural gas production is used to produce electricity, the rest of it is absorbed in the production of fertiliser and petrochemical processes. In the future, gas use will grow fastest in stationary energy uses (power generation), where IEA expects gas use to be multiplied three times by 4 2020 . 33. Almost 70% of India’s natural gas reserves are found in the Bombay High basin and the western state of Gujarat. The proven gas reserves of India peaked almost ten years ago. In 1999, they were evaluated at approximately 700 billion cubic meters. 34. Domestic natural gas production is growing steadily and reached 18 mtoe in 1997, all of it being absorbed domestically. (See Figure 9) Figure 10 India – NGLs production (kb/d) 95 89 89 89 89 90 85 80 79 80 75 70 70 65 60 55 50 1994 1995 1996 1997 1998 1999 2000 4 IEA, World Energy Outlook 2000. 10 Note: 2000 is an estimate. 35. The government’s focus is to develop domestic production by enhancing gas production at the Tapti fields and utilising previously flared gas in the Bombay High. Through these efforts, natural gas production has increased by around 10% per annum since 1987. But considering the maturity of the fields being exploited and the size of the reserves, the domestic gas supply is not likely to keep pace with domestic gas demand. India will have to import most of its incremental gas requirements, either via pipelines or LNG tankers. Large amounts are being presently invested in India to develop a pipeline network and LNG terminals. 36. The most likely source for piped gas in the future would be Bangladesh. Current proven reserves of natural gas in Bangladesh are 311 bcm, but the foreign firms involved in natural gas exploration in Bangladesh — Mobil, Unocal and others — believe that reserves may be much larger. Shell, which backs the plan to export to India, recently estimated Bangladeshi gas reserves at 1076 bcm. Facing the political sensitivities in Bangladesh over the issue of selling off its natural resources, the Indian government is also considering the possibility of importing gas from Myanmar, through the northeastern Indian state of Assam. 37. Though the unit cost is higher, the other possibility that might emerge as more feasible in the near future is to import LNG. IEA forecasts that natural gas demand in India could reach 54 bcm by 2010. Assume that India's domestic production will stabilise at around the double of 1997, roughly 30 bcm. Assume also that the entire consumption is satisfied through imports of LNG. Then, there would be room for imports in the order of 24 bcm, or close to 18 mt of LNG by 2010. 6 terminals of 3 mt capacity could supply such a quantity. 38. Currently, there are announced plans for about 10-20 LNG terminals in India, all at various stages of development. Petronet, a joint venture between ONGC, IOC, the GAIL, Bharat Petroleum, and the National Thermal Power Corporation (NTPC), will conduct the largest state sector projects. Under the current plan, each of the Indian state firms would own a 10% stake, with the remaining 50% offered to financial institutions and private shareholders, though questions about the equity structure and financing for the project have delayed implementation. Petronet plans two import terminals, one at Dahej (operated by Gaz de France) and the other at Cochin. A contract has been signed with Qatar's RasGas for a take-or-pay agreement for LNG supplies beginning in mid-2003, hence providing a strong incentive for the project to go forward. 39. Four other large foreign-financed projects are currently underway to facilitate imports of LNG. A consortium headed by British Gas, and including NTPC, is planning an import terminal at Pipavav, which will initially handle LNG imported from Yemen and will supply Gujarat. Enron is building an import terminal to supply its electric power generation plant at Dabhol with LNG to be supplied by Oman and Abu Dhabi. Enron's MetGas unit would distribute gas to other customers in southern India via pipeline. A consortium headed by Siemens and including CMS Energy, Woodside Petroleum, and Unocal is planning to build an import terminal at Ennore to supply an electric power plant. The Ennore project has been delayed by the lack of a power purchase agreement and financial guarantees. TotalFina of France, in a joint venture with Tata Electric and GAIL, is planning a facility at Trombay, which will supply gas to a power plant and other users in Maharashstra, supplementing the Enron Dabhol project. 40. These projects are facing a number of uncertainties. Among them are the price of LNG, the supply arrangements, the shipping arrangements, the guarantees of final off-takes of gas by large consumers, and the final price of the gas sold to Indian consumers. At the current time, it is not known to what extent any or all of these project will eventually take place, and which ones will come onstream first. 11 41. With regards to the final price of natural gas, the introduction of a market determined price mechanism in India is a welcome development. The price of natural gas is now indexed to the international price of fuel oil, and the level of subsidy will be gradually reduced, with a final goal to apply a hundred percent import parity. More difficulties lie downstream, in the price determination of electricity, conditioning the possibility to set up LNG-fired power plants. 42. One problem with the current investment climate in Indian LNG imports is the lack of a coherent regulatory structure. India is currently working on a new legal framework for natural gas, and a bill to establish it. The "Petrocomm Regulatory Bill" is expected to be taken up by the Indian Parliament in 2000. The new legislation is expected to set up a national regulatory body for natural gas, and to allow for exclusive distribution rights to be awarded in some areas to guarantee a market for new gas projects. Gas prices most likely will not be fixed by the new scheme, but price ceilings may be imposed. It remains unclear whether gas regulation will be under the same body as the oil industry. 43. In spite of the numerous uncertainties yet to be cleared for both piped gas and LNG, India is likely to become one of the world’s largest gas importers in the coming two decades. Conclusions 44. India is an energy importing country, primarily of oil and soon of gas. Its imports are growing while its domestic production lags behind the fast pace of demand growth. The Indian government is conscious of the need to diversify its sources of supply and also to boost domestic supply of primary energy as well as final products (LPG, kerosene, natural gas, lubes, etc.). On the exploration and production front, developments are slow. They reflect in part the state of India’s oil and gas reserves: mature fields, limited reserves or costly new developments. The response on the front of products is better and India’s refining capacity is growing rapidly. Similarly, public and private companies are investing large amounts in the development of LNG terminals in order to be the first able to capture part of the Indian gas market. 45. This has a number of implications: ½ India’s energy security is at stake and the country could play a leading role among developing countries to set up emergency preparedness mechanisms. ½ The need for reforms in the oil sector is all the more pressing to improve resource allocation for investments and rationalise consumption. In the gas sector, and in particular in the LNG sector, a gas policy is yet to be defined, facilitating firms’ investments. ½ Last but not least, a growing consumption of oil and gas translates into larger CO2 emissions. Though India’s emissions per capita are among the lowest in the world, total Indian emissions are already large and growing rapidly, in particular from the 5 consumption of oil and gas, but also from coal combustion . Power production from gas could provide a lower emission production trend than from coal, providing sufficient investments are available to be carried out. 5 India’s total CO2 emissions reached 880 mt of CO2 in 1997, a level similar to the emissions of Germany. In 2020, India’s emissions could reach 2169 mt of CO2, a level equal to twice the 1997 level of Japan’s emissions. 12 REFERENCES IEA 1997, Draft Report on India’s Energy Challenges and Recent Policy Developments, IEA/NMC Committee, Room Document #2. IEA 1999a, World Energy Outlook, Insights 1999, Looking at Energy Subsidies, Chapter 7: India, p. 129-141. IEA 1999b, India: Recent energy Policy Developments, IEA/NMC(99)6. IEA 2000, World Energy Outlook 2000, Paris, November. EIA 2000, India, http://www.eia.doe.gov/emeu/cabs/india.html Economist Intelligence Unit 1999, Country Report, India-Nepal, London, fourth quarter 1999. Indian Ministry of Finances 2000, Economic Survey, New Delhi, February. 13