The sale of a 98% stake in Essar Oil to a consortium led by Russian state-owned oil giant Rosneft has, unsurprisingly, drawn significant attention. Rs72,800 crore is not chump change. Given India’s bad loans problem and the fact that Essar’s debt has been among the highest, the deal could be—as Chanda Kochhar, managing director of ICICI Bank, put it—“a significant step in the process of deleveraging the balance sheets of Indian corporates”. The other aspect of the sale is just as interesting—what it says about India’s place in the global energy market.
According to the International Energy Agency, India will cross Japan as the world’s third largest oil user this year, and is expected to have the highest rate of growth of crude demand globally through 2040. Asian Development Bank projections have India’s dependence on imports during the 2010-35 period growing from 76% to 92% for oil and 20% to 36% for gas. This is not an energy security scenario that encourages complacency.
But New Delhi currently enjoys an advantage. Unlike, say, China, whose energy binge a decade ago kicked off at a commodities peak, India is poised for take-off at a time of rock-bottom prices. How long this situation will last remains to be seen. But it is likely to be for a while yet. The Organization of the Petroleum Exporting Countries’ purported November production-cut deal faces two main obstacles.
Firstly, the quantum of the cut, less than one million barrels a day, is insufficient to deal with the existing supply overhang—a fact borne out by lukewarm market reaction to the news of the deal. Secondly, the political and strategic difficulties of allocating the burden of the cut.
The US shale industry is another factor. It has suffered during the oil plunge, with marginal producers squeezed out and drilling activity flatlining. But it has also proved resilient, with drilling activity starting to recover post-May. Any price rise will increase the shale industry’s skin in the game, maintaining a balance beneficial to consumers.
All of which shows—to circle back to the Rosneft deal—why the Indian market, with its expected demand surge, is currently such a lucrative prospect for oil suppliers. The leverage this gives New Delhi has allowed it to position itself better in negotiations with traditional suppliers—according to the Central Statistics Office’s Energy Statistics 2015 report, 59% of India’s crude imports were sourced from West Asia as of 2013-14—and bring about a certain amount of churn. India is increasing its focus on African suppliers such as Nigeria, while South American supplies are also rising. And in June, Iraq replaced Saudi Arabia as the top supplier.
And that has resulted in better deals and more inbound investment in the energy sector. Gulf countries have stopped levying the “Asian Premium” (a higher rate for crude sold to Asian countries); Riyadh has been negotiating shipping crude to India in its own tankers, saving Indian companies shipping costs; Abu Dhabi has entered an energy partnership with India that includes upstream and downstream investments. India’s new Hydrocarbon Exploration Licensing Policy, putting a new market-friendly regime in place for oil and gas exploration back in March, has helped as well.
This space that New Delhi now has to advance its energy security must be exploited fully. By some estimates, 60-70% of India’s own reserves remain unexplored. Given the interest in the Indian market, there is no need for the investment to rectify this to come from the government; indeed, that would be undesirable. Concurrently, this is also a good time for outbound investment flows. State firms like the Oil and Natural Gas Corp. Ltd are not bound to reduce capex unlike private oil companies. This means a relatively clear run for Indian investments in foreign energy assets at a time when global companies are leery of pouring in more money. The fourth quarter of 2015, for instance, saw Indian companies sign on to $3 billion of foreign asset purchases, while another $5 billion could go towards Siberian oil and gas fields that would give Indian companies an equity share equivalent to a third of total domestic output.
The commodities slump has already helped tame inflation in India. Now, if New Delhi plays its cards right, it could lock in energy arrangements that would go a long way towards enabling the Narendra Modi government’s stress on boosting manufacturing. It is rare indeed for global economic conditions to align so propitiously for domestic policies.
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