Of the total oil production of around 83 million barrels per day (mbd), the US consumes around 23mbd, and China, 9mbd. Over the next two decades, consumption in China is likely to double. And India’s current consumption of 3mbd is likely to increase to 5mbd by 2030. As a major oil importing country, we need a strategy for our energy security. Though our additional needs are smaller than China’s, the energy scene has changed significantly in the last two decades, and requires initiatives that are different from those that have been followed so far.
The most important change is the growth of the state-control on oil. The largest companies—Saudi Aramco, Gazprom, Venezuela’s PDVSA, and NIOC of Iran—have outpaced the old ‘seven sisters’ of oil that included BP, Shell and Texaco. State oil majors now control one-third of the total production of oil and one-third of total oil and gas reserves. Also, the old seven sisters, now down to four, produce about 10% and control only 3% of the reserves. IEA (International Energy Association) estimates that 90% of additions to supply would come from developing countries, while 40% came from industrialized countries in the past. In short, future increments to global oil production will be more a function of state policy than of commercial exploitation. Given the unwillingness of most developing country governments to allow national oil companies to reinvest their profits back into industry, it is easy to see there is concern over optimum development of supplies in the future.
China has understood this very well, and has been aggressively pursuing acquisition of overseas oil and gas assets, investing close to $50 billion so far on new assets. India is far behind, its efforts sporadic and poorly coordinated, often unable to choose between politics and energy security.
Nowhere is this more evident than in the Iran gas deal. Having given up the efforts of a secure pipeline-based supply, India has been negotiating for LNG from Iran, but that now seems stuck over the price. India’s expectations are for a price of $3.2 per million British thermal units (mmbtu), and Iran is looking for around $5 per mmbtu. The media has been yelling about the addition of $11 billion to the cost of the deal, without really understanding the dynamics of the market.
First, there is little chance over the next decade that oil prices will fall below $50 a barrel. Oil-producing countries have recognized the advantage of these high oil prices, and are working long-term development programmes in their own countries that would require revenues of the current order being generated from oil. For the states and the state oil companies that control production, this is just fine.
At present, the price of gas in the world markets is informally linked to oil, and an approximate multiple of 10 or 11 gives the benchmark figure. Thus, gas prices lower than $5 per mmbtu are not available anywhere. There is a move by gas producers to de-link gas prices from oil to set a separate marker, but this is still in its infancy. They would like the multiple between oil and gas to be no more than five or six, which translates to gas prices of $10-$11 per mmbtu.
Second, we need the gas. True, the K-G basin has proved very productive, and RIL is laying 48-inch pipelines to pipe the gas through Andhra Pradesh, Tamil Nadu and into Maharashtra and Gujarat. The other finds, of the Gujarat State Corporation, and of ONGC, seem very much more iffy. In fact, there is mystery surrounding the Gujarat State Corporation find. There are rumours that the find is much smaller than earlier announced, and there are also rumours that business rivalry from the private-sector players is suppressing progress. Whatever the truth, we are unlikely to see this gas for the next four to five years. Hence, the western states are likely to be short of gas, as the Bombay High gas supplies decline. The Qatar gas to Petronet is the only available reliable long-term source. Gas from Iran is vital.
Third, there is the diplomatic angle. Iran has been a friend, and, given concerns over Afghanistan and Pakistan, is an important ally in the region. It has been a reliable source of supply in the past, and once LNG facilities are set up, it can easily look for other customers. It is important to clinch this deal, for there are others waiting in the wings to snap up this supply. Finally, it is clear even the private-sector gas that will be available from next year, would, at best, be priced around $5 to $5.5 per mmbtu, initially. If this is an affordable and workable price for domestic supply, why should we stand on the earlier price of $3.2 mmbtu, which, given the current economics of oil and gas, is simply unrealistic.
The problem of joining the Lions’ Club, a friend told me, is that, at meetings, one finds that everyone else is a Lion, too. It is time that India realized this, and planned its energy strategies accordingly.
S. Narayan is a former finance secretary and economic adviser to the Prime Minister of India. Comments are welcome at email@example.com