Home / Opinion / India’s time to capitalize on oil and gas sector

The dominance of oil, natural gas and coal in the global energy mix is being questioned by intensifying carbon policies, technological disruptions in mobility and, to an extent, changing energy geopolitics. A closer look at India’s energy mix reflects a clear trend towards gas and renewables, but there is no imminent danger to demand for oil, forecast to grow at least until 2040. However, oil companies are under pressure to prepare for a possible low-carbon future. There is a fear of being too late to embrace newer energy sources, matched by equally high risks in moving too fast. In such a scenario, oil companies are likely to take a two-pronged approach: diversify into new sources of energy while capitalizing on growth opportunities in conventional forms of energy.

Today, the major fossil fuels account for more than 90% of India’s total primary commercial energy supply (TPCES). At present, India’s import dependence in the oil and gas sector is significant and the Prime Minister has set a target to reduce dependence on crude imports by 10% by 2022. The moment is opportune for India to take advantage of shifting pricing and supply dynamics in the oil and gas sector globally. In order to leverage the resources advantage, it should focus on the following areas:

Taking advantage of softened oil prices: The oil and gas industry is recovering from the upheaval caused by the fall in global oil prices and weak demand. The price per barrel of Brent crude crossed $60 mark this month, against $40 a year ago; still well below the $115 peak reached in 2011. Even with the uptick in oil prices expected to continue, it is a buyer’s market and India needs to be aggressive in scouting for the best prices and competing supply sources. Recently, government-owned refiners started taking supplies of US crude in a bid to curtail dependence on West Asian crude and Opec (Organization of the Petroleum Exporting Countries) in an expanded supply market.

While the slump in oil prices did not spell good news for global upstream firms and many curtailed their exploration and production efforts, it worked differently for Indian government-owned upstream companies, which hit the gas on exploration, production and asset acquisition. This was on account of a significant decline in the cost of equipment and services associated with exploration and production. That effort must continue.

With 3.14 million sq. km of potential reserves lying unexplored until 2016, India’s potential in the oil and gas sector is immense and there exists vast headroom for new discoveries.

Another area that calls for attention is enhanced oil recovery. With the global average recovery factor for a typical oilfield being around 40%, a substantial amount of identified oil ends up as leftover despite existing production infrastructure. There is a need to enhance recovery from oilfields to reduce import dependence.

Adoption of digitization, automation and robotics, which can substantially reduce operational costs and increase oilfield productivity, should be considered seriously.

Refining and re-gassing more efficiently while adding value in petrochemicals: India has emerged as a refining hub in Asia, serving a massive domestic market for refined petroleum products and even exports. Also, the government’s push towards a gas-based economy has given significant thrust to liquefied natural gas (LNG) imports, given the low domestic natural gas output. Both these elements present an opportunity for India’s downstream and midstream oil and gas sectors. The key word here is ‘efficiency’. With a slump in global oil and gas prices, refiners and LNG importers have an opportunity to get more bang for their buck by enhancing efficiency in refining and re-gasification of LNG. The key to enhancing efficiency lies in the optimum utilization of resources and adoption of the latest technologies.

The evolving market dynamics, including increasing demand and competition from new entrants, need to be tracked by downstream firms. Some of the key areas to focus in the the mid- to long-term include enhancing the overall operational efficiency of plants, flexibility in refinery configuration, improving energy efficiency, upgrading the quality of fuel while upgrading facilities to produce BS-IV and BS-VI compliant fuels.

Petrochemicals offer a great opportunity to beef up the downstream value chain. India’s petrochemical market is expected to grow at a compound annual growth rate of 10% over the next five years to reach the $100 billion mark by 2022. The industry can potentially enhance the country’s growth through the development of niche products for exports and advanced integrated complexes for polymer production. Petrochemicals are also lucrative as companies have complete pricing freedom for these products.

Strengthening sales and distribution networks: With major fuels in India deregulated, retailers must focus on their sale and distribution networks, particularly with more companies entering a market earlier dominated by state-owned companies.

Similar efforts should be made for petrochemicals. Strengthening the sales and distribution network for petrochemicals will ease margin pressures for distributors, while ensuring reliable supply for small to mid-sized distributors. The current distribution network is concentrated around a few producers, calling for the development of a strong network.

To sum up, Indian stakeholders need to adopt an aggressive but cautious approach to fully harness the opportunity created as a result of changing dynamics in the global oil and gas sector. Aligning the current business model for the right mix of growth options in conventional and newer energy will help companies emerge at the top while also helping India reduce dependence on crude imports.

Manish Aggarwal and Niladri Bhattacharjee are with KPMG in India.

(The authors would like to thank Nitin Khanna, associate director, KPMG in India, for his assistance.)

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