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Business News/ Industry / Energy/  India should stop building refineries: Fereidun Fesharaki
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India should stop building refineries: Fereidun Fesharaki

FACTS Global Energy chief on why oil and gas investors find India unattractive and why India should focus on its domestic energy firms

Fereidun Fesharaki says if he were a foreign investor, India would be low on his list of priorities. Photo: Goh Seng Chong/Bloomberg (Goh Seng Chong/Bloomberg)Premium
Fereidun Fesharaki says if he were a foreign investor, India would be low on his list of priorities. Photo: Goh Seng Chong/Bloomberg

(Goh Seng Chong/Bloomberg)

Mumbai: India should stop building new refineries as state-run and private refiners are likely to shift focus from exports to cater to the increasing domestic demand for petroleum products, with oil prices likely to head south in the coming two-three years, says Fereidun Fesharaki, an advisor to almost all the large global energy firms, including those in India, besides being chairman of FACTS Global Energy, an international energy consulting firm.

In an interview on Thursday, Fesharaki said why the gas price formula suggested by the committee under the chairmanship of C. Rangarajan, chairman of the Prime Minister’s economic advisory council, is flawed; why an alternate formula could help bring down the price of gas in India in tandem with global oil prices; why oil and gas investors find India unattractive; and why India should focus on the prospects of its domestic energy firms rather than scout for international investment. Edited excerpts:

Have the sentiments of global oil and gas investors looking at India been affected with the constant flip-flop in the government on the issue of gas pricing coupled with regulatory hurdles?

India doesn’t have huge hydrocarbon resources, has a lot of bureaucracy and a difficult government. If I was a foreign investor, India would be low on my list of priority. But India has some captive companies—Reliance Industries Ltd (RIL), Oil and Natural Gas Corp. Ltd (ONGC), Oil India Ltd (OIL) and Gujarat State Petroleum Corp. (GSPC), which are already here and have assets to invest in.

The issue is not foreign investment, but domestic investment. Reliance, ONGC and GSPC have a reasonable idea of what they want in terms of higher gas prices and production can be doubled if prices are increased. The power capacity sitting idle in the country at present is a travesty. Thousands of megawatts of capacity is unutilized and we say India is short on electricity. People from outside will be stupid to come and invest in India because they see such capacity lying idle and people unwilling to pay higher tariffs to use it. The government is unwilling to raise tariffs because it is politically unpopular. India has no reason for power cuts. It is not because there is no electricity, it is because of bad policy.

Domestic gas prices have been a subject of much debate in India.

I think what the committee (Rangarajan Committee) did was to decide on a conclusion first and then tried to find a way to reach it. Because they anticipated people raising irrelevant questions over the formula they decided factor in all sorts of global prices. But it is too complicated a way to do something that is very simple. For instance, the formula takes into account US prices, which is irrelevant to India. The US is flush with shale gas, has a 500 million tonne LNG (liquefied natural gas)-equivalent consumption, thousands of buyers and sellers and pipelines in every corner. In India, the question is simple: do you prefer to have a low price, big imports and a weak economy? Or, do you prefer high domestic price, less imports and electricity supplied to every sector?

To me, the right way to calculate gas price is by finding out the best price of imported gas that India has been able to achieve, which is the price at which Petronet LNG Ltd procures imported gas from Qatar under a contract that dates back to 2004. Fix the price formula at 75-80% of that for the first year or two, and then gradually add 5% each year till, let’s say, in five-seven years you achieve market-linked prices.

If this is done, then with an imminent fall in global crude prices, the imported price being paid by Petronet will also come down in the coming days, and so will the gas price. I don’t think domestic companies should be paid more than what is paid for imported gas. If the price of gas internationally comes down to, let’s say, $9-10 per million British thermal unit (mBtu), Indian companies should get less than that, but the price should be linked to this sliding scale.

With the abundant supply of shale gas in the US, the dynamics of the world oil market are changing. What will be the implications, especially for India?

Shale gas has been a success in the US because it contains a lot of liquid known as shale oil. By 2015, the US will produce 3 million barrels per day (mbpd) of shale oil, which is equal to the oil production of Kuwait. This oil is very light and sweet. The US actually needs heavy crude because its refineries are some of the most sophisticated in the world. So a lot of crude from the African countries that earlier supplied to the US, especially Nigeria is surplus. The US cannot export its shale oil, so it will be looking to import some heavy crude to blend with the shale oil and use in its refineries.

US oil imports have fallen by 1.5 mbpd in the past three years. Price of oil worldwide is coming down. Oil trades in a band of $80-120 per barrel. And within the next two to three years, it will move towards the lower end of this band. If sweet crude becomes cheap enough, India can use more of it, although it won’t yield 100% efficiency to refineries that are complex in nature. The less-efficient refineries, which India has plenty of, will benefit.

Also, the difference between light and heavy crude will come down (with supply of sweet crude increasing), and so will the competitiveness of refineries. Everyone built sophisticated refineries in India, including Reliance and Essar thinking heavy crude will be cheap. But if everyone demands heavy crude, it becomes expensive and all of them lose out. If everyone thinks of the same idea at the same time, then it’s a bad idea.

How will this impact the refining environment in India?

State-run oil and gas companies do not have enough capacity to cater to domestic demand even now. Which is why, even today Essar is supplying to the domestic market in addition to exports, though Reliance exports most of its products. If the price of oil comes down, Reliance and Essar will find it more economical to sell within India. The only reason they sell outside is there is $30-40 gap between Indian and international prices. If there is no gap in prices, they can supply domestically.

For India, the right policy is to stop building refineries since the country doesn’t have much crude resources, and procuring crude from outside is more difficult than selling the end product. The country should use all its refining capacity for internal consumption and at least 10 more years of local demand can be accommodated. Most other countries don’t have a huge domestic consumption like India does and nobody else in the world imports crude and exports refined products.

Iranian oil has been very important to India, and with all the curbs imposed by the US, what will be the impact on India?

India faces two problems—how to pay Iran for the crude since transferring money to Iran is impossible and you cannot fight the giant—the US has blocked all paths of payment. The second problem is insurance since European Union bans insuring ships carrying Iran crude. The Japanese and Koreans insure ships themselves, but that does not work for India. Iranian ships can deliver some volumes themselves, but it is lower than before since the ships aren’t fully insured and the payment is in rupee terms. So the Iranians have no choice, but India must be liking it this way.

It is better for India to pay in rupees than in dollars, forcing Iran to buy Indian goods. Iranian oil is reasonably important to India, with whom it shares a long and historical relationship. It can’t just terminate the relationhip. They need to take things easy till the issue is sorted out. But thanks to the US, India and China have benefitted greatly by selling local currency and local goods.

What do you think the Indian oil minister should do to ensure energy security for the country given the current circumstances?

I think the oil minister is a good minister. He has the right attitude and approach. But in India there are a lot of other factors in place that comes from coalition politics, worries about elections. Everybody has an eye on whether their decisions will cost them votes.

The right thing to do would be to realize that India is living in a world where it has to import its energy, and link the price to the international market. India needs to remove subsidy on oil products slowly, in phases. And there has to be a consensus between the government and the opposition that this policy will not change.

The problem with India is that it backtracks on policy decisions. Stick to what you say and make it a policy. Otherwise, investors discount for a lot of risk due to lack of certainty.

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Published: 21 Jul 2013, 11:32 PM IST
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