The past year, marked by declining international crude prices, has been a blessing for net energy importing countries such as India. The country’s dependence on imported fuels, such as oil and gas, remained high, as the falling domestic production ex-acerbated the demand-supply gap. Moreover, investment in exploration and production (E&P) remained muted, owing to a low-price scenario as well as policy uncertainty. Consumption figures, on the other hand, remained robust, due to the recovery in economic growth spurred by better business cycles.
Trends
- Crude oil production: Considering domestic production, the scenario remained grim due to a host of factors such as ageing fields and low prices leading to downward revisions of budgets by E&P companies. During 2015-16, India produced 36.95 million tonnes (mt) of crude oil, thereby registering a slight decline over the 37.46 mt produced in the preceding fiscal. During the first two months of the current fiscal (2016-17), crude oil production was reported at around 6 mt, roughly the same level recorded during the first two months of 2015-16. Considering the overall trend during the past five fiscal years, crude oil production registered a decline of 0.15 per cent. Production from the major fields in the country, particularly the Western offshore fields and onshore fields in Gujarat as well as fields in the Northeast, is low as these fields are old and ageing. Besides, no major discoveries have been made in the recent past. Further, the challenges associated with the development of marginal and deepwater fields in terms of transfer of technology, logistics, isolated structures and viability thereof continue to impact output.
- Natural gas production: Natural gas production (gross figures) in India in 2015-16 was 32.25 billion cubic metres (bcm), a decline from the 33.66 bcm recorded in 2014-15. For 2016-17 (April and May), the total natural gas production was reported to be 5.14 bcm, a marginal decline from the 5.52 bcm recorded in the corresponding period of the preceding fiscal. During the five-year period 2011-12 to 2015-16, the production of natural gas declined from 47.55 bcm to just over 32 bcm.
- Petroleum products production: The total production of petroleum products in India in 2015-16 stood at 231.27 mt (provisional), about 5 per cent higher than the 220.47 mt recorded in 2014-15. During the period 2011-12 to 2015-16, the production of petroleum products registered a compound annual growth rate (CAGR) of over 3 per cent. For 2016-17 (April and May), the production of petroleum products was reported to be 39.63 mt, higher than the 35.91 mt recorded during the corresponding period of 2015-16.
- Offtake of petroleum products: The demand for petroleum products has been increasing over the years. In 2015-16, India registered the highest demand growth of 11 per cent over the five-year period 2011-12 to 2015-16. As of 2015-16, the demand for petroleum products stood at 183.5 mt, as against 165.52 mt in 2014-15. In the first quarter of 2016-17, the consumption of oil products stood at 48.5 mt, an increase of 7.7 per cent over the corresponding period of the previous year. Diesel consumption rose by 4.7 per cent to 20.1 mt during the same quarter of 2016-17. The country’s dependence on crude oil imports also jumped to over 80 per cent to meet the growing demand. Among petroleum products, high speed diesel has traditionally constituted the highest share, followed by motor spirit and liquefied petroleum gas (LPG).
- Consumption of natural gas: Natural gas continues to have a small share in India’s energy mix, accounting for around 5 per cent. The consumption of natural gas showed a declining trend from 2011-12 to 2014-15, after which demand increased slightly by 3 per cent to 46.62 bcm in 2015-16. Total natural gas consumption was higher by 13.08 per cent at 8,222 million metric standard cubic metres per day (mmscmd) in April-May 2016, in comparison to the corresponding period of 2015-16.
- Trend in liquefied natural gas (LNG) uptake: At present, India is the fourth largest LNG consumer in the world, accounting for nearly 6 per cent of the global LNG market. The cumulative import of 4,224 million metric standard cubic metres (mmscm) in the first two months of the current fiscal year (April and May 2016) was 44.4 per cent higher than the 2,925 mmscm imported in the corresponding period in 2015-16. During the period 2011-12 to 2015-16, LNG consumption increased from 15 bcm to 21 bcm. Besides, throughout the period under consideration, it increasingly replaced domestically produced gas, as reflected by its share in total gas consumption in the country. In 2011-12, about 27 per cent of the gas consumed was LNG and its share increased to 46 per cent in 2015-16.
- Crude oil pricing trends: The price of crude oil in the country is determined by the Indian basket, which is the weighted average of the price of Oman and Dubai sour crude price benchmarks and the Brent (dated) sweet crude price benchmark. The Petroleum Planning and Analysis Cell revises weights periodically and for 2014-15 the ratio of Oman and Dubai prices to Brent crude prices was held at 72.28 to 27.72 (latest figures available). Historically, the weights have shifted to Oman and Dubai crude from Brent crude as India imports most of its oil from the Middle East.
- Natural gas pricing trends: Domestically produced gas, which is supplied by public sector units, is allocated to specific customers and sold under the administered pricing mechanism whereas gas produced by joint ventures/private companies is sold as per production sharing contracts. Over the past few years, natural gas pricing policies have undergone several changes and reforms. Recently, the government introduced the Policy for Marketing and Pricing Freedom for New Gas Production from Deepwater, Ultra Deepwater and High Pressure High Temperature Areas. Under this policy, producers will be allowed marketing freedom (including pricing freedom) for all discoveries in these areas which are yet to commence commercial production, as on January 1, 2016 and for all future discoveries in such areas. However, in order to protect user industries from sharp increases, this pricing freedom will be accompanied by a price ceiling.
- LNG pricing: The price of LNG (imported gas) is not regulated by the government and varies according to the source of supply. Sourcing can be done via spot cargoes, which are short-term contracts, or through long-term contracts, which may be spread over a 20-year period. Petronet LNG Limited, the largest LNG importer in India, buys the resource primarily from Qatar, followed by Australia (under long-term contracts). The company also sources LNG through spot contracts. The price of LNG bought from Qatar was recently renegotiated owing to a massive difference in the prevailing spot LNG prices and the price at which imports from Qatar were coming in. According to the Ministry of Petroleum and Natural Gas (MoPNG), the revision in the LNG agreement with Qatar has helped bring down the cost of importing natural gas to less than $5 per million metric British thermal units (mmBtu) from the earlier $12 per mmBtu.
- Pricing of petroleum products: The pricing trend of key petroleum products has been mixed. The price of petrol in Delhi stood at Rs 66.93 per litre on June 16, 2015 and was reduced to Rs 65.65 per litre on June 1, 2016. The price of diesel in Delhi stood at Rs 50.93 per litre on June 16, 2015 and increased to Rs 53.95 per litre on June 1, 2016. LPG cylinders continue to be one of the most heavily subsidised petroleum products in the country. The government has decided to restrict the supply of subsidised LPG cylinders to 12 per year per consumer. In Delhi, as of June 1, 2016, the price of subsidised LPG stood at Rs 548.50 (under the Direct Benefit Transfer of LPG Scheme). Kerosene prices have also remained low in the past decade, varying from Rs 10 to Rs 15 per litre. In Mumbai, the price of kerosene stood at Rs 15.42 per litre on March 13, 2016 (Delhi was declared a kerosene-free state in June 2014).
- Coal bed methane (CBM): According to the MoPNG, during 2015-16, CBM production was 1.1 mmscmd, a growth of 64 per cent over the previous year. Essar Oil was the highest producer with an output of 0.65 mmscmd. Recently, in June 2016, Essar’s production crossed the 1 mmscmd mark. The company taps CBM from its Raniganj East block. Meanwhile, Great Eastern Energy Corporation Limited, another important CBM producer, recorded a production of 0.4 mmscmd from its Raniganj South block during the year. The Oil and Natural Gas Corporation’s Jharia block and Reliance Industries Limited’s Sohagpur East and Sohagpur West blocks recorded a total incidental production of about 7,146 standard cubic metres per day.
- Growth in pipeline network: In the midstream segment, over the past year, there were only nominal additions to pipeline infrastructure. As of April 2016, the total length of the oil, gas and product pipeline network in the country stood at about 41,070 km, a growth of about 3.4 per cent over the previous fiscal year’s figure of 39,710 km. At present, a number of pipeline projects are under way, most of which pertain to gas pipelines. The city gas pipeline network has grown at a CAGR of 15 per cent between 2012 and 2016 (till June 2016) while the number of compressed natural gas stations increased at a CAGR of 16 per cent. New city gas distribution bidding rounds (fifth and sixth) were undertaken by the Petroleum and Natural Gas Regulatory Board. A total of 54 geographical areas were offered under the two rounds.
Outlook
- While the present scenario, marked by low crude prices, definitely bodes well for net importing oil and gas countries such as India, a focus on increasing domestic production (and thus reducing reliance on imports in the long run) must rank high on the country’s priority list. Besides, the country needs to focus on building strategic oil reserves and investing in equity crude oil to tide over times when oil prices bounce back to levels that had prevailed earlier.
- Introduction of new policies such as the Hydrocarbon Exploration and Licensing Policy and other enabling measures have been welcomed. However, there are a few grey areas that may impact business decisions in the industry. Effective implementation of the new framework, of course, will be crucial in shaping the domestic oil and gas markets.
