NEW DELHI: The Narendra Modi government will have to decide on the vexed issue of crude oil purchases from Iran as soon as it assumes office. Not only will it have to deal with the changing global energy paradigm, the new government will also have to resolve the brewing crisis in state electricity distribution companies (discoms) due to their poor financial health, which has resulted in delayed payment to generation utilities. This comes against the backdrop of India’s electricity demand hitting an all-time high.
“Given that meeting India’s energy demands holds the key to economic growth, the incoming government is seized of the issues at hand," said a senior government official, requesting anonymity.
The Iran conundrum
India has kept its option open to purchase oil from Iran, with then foreign minister Sushma Swaraj informing her visiting Iranian counterpart, Javad Zarif, that New Delhi will take a decision after the national polls come to an end on 23 May.
India is among Iran’s top oil customers and has adopted a calibrated approach to the US’s sanctions with Indian Oil Corp. Ltd (IOC) tying up an additional 250,000 tonnes of crude oil per month from the world’s biggest oil producer, Saudi Arabian Oil Co. (Saudi Aramco), and inking two term contracts totalling 4.6mt of US crude oil for 2019-20 from Norway’s Equinor ASA and Algerian state energy company Sonatrach.
The development comes against the backdrop of tightening US sanctions against Iran, and production curbs by the Organization of Petroleum Exporting Countries (Opec), which have driven up oil prices. Higher oil prices stoke inflation and hurt economic growth in India, whose energy needs are primarily met through imports. India imports more than 80% of its oil requirements and around 18% of the natural gas it needs.
“This (Iran oil) is the biggest and the earliest headache for the next government," said Saurabh Chandra, India’s former petroleum secretary.
Notwithstanding the uncertainties of global energy trade, China and India are working to create a buyers’ bloc to bargain collectively for oil supplies and have set up a joint working group (on energy) for the same. The coming together of strategic rivals will have a major bearing on the global energy architecture, as the scope of such grouping will not only be limited to crude oil but will also be extended to liquefied natural gas (LNG). It will also include cargo swap options.
The US’s conditional waiver for Iranian oil imports to eight countries, including China and India, expired on 2 May. This resulted in an urgent requirement to procure about 12 million tonnes of extra crude to urgently bridge the supply gap caused by the exit of Iran from its energy basket. India has been a major buyer of Iranian oil with imports of 23.5 million tonnes in 2018-19. While supplies are not an issue, the price at which the crude oil is to be bought will have a bearing on the Indian economy.
“It is not an easy situation for any government. The way things are, oil prices may touch $90-100 per barrel by November-December. Iran is only a part of the bigger problem. Opec has been more stringent on maintaining production cuts and even Saudi Arabia is not upping production as promised to the US. We need to focus on a gas-based economy to replace oil," said S.C. Sharma, former advisor at federal government’s think tank Planning Commission (NITI Aayog).
The oil slick
It is difficult for India to come up with options offering terms as attractive as those offered by Iran, including 60-day credit, free insurance and shipping. This comes against the backdrop of growing tension in West Asia with sabotage attacks in strait of Hormuz, Iran threatening to shut down the strait and US deploying USS Abraham Lincoln carrier strike group and a bomber task force in the region.
According to S&P Global Platts, “the Strait of Hormuz, at the mouth of the Persian Gulf, is viewed as the most important oil choke point in the world, with Saudi Arabia, Iraq, Iran, Kuwait and the UAE all dependent on it to move crude and refined products on to the world market, primarily to Asian buyers."
The prices in the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, have been firming up. Any spike in global crude prices will impact India’s oil import bill and trade deficit. Every dollar increase in the price of oil raises the import bill by around ₹10,700 crore on an annual basis. Besides, the Donald Trump administration has also imposed sanctions on Venezuela’s state-owned oil firm Petróleos de Venezuela SA.
India may step up its efforts to buy equity energy overseas, such as in Guyana, which has discovered one of the largest oil fields. Indian energy firms have already invested around $38 billion to buy equity energy stakes in 28 countries, including Australia, Azerbaijan, Bangladesh, Brazil, Canada, Indonesia, Iran, Iraq, Libya, Nigeria and Russia.
Boost to power for all
The new government would also step up its efforts to supply 24x7 power to all. In the build-up to the general and the state assembly elections, additional power requisitioning by distribution companies led to a short-term hike in electricity prices.
“Exceptional work has been done in adding to the electricity generated and in laying down of transmission lines and in putting up the nationwide transmission grid. India can now claim that access to electricity is no longer an issue. In fact, India has also become a net exporter of electricity," the Bharatiya Janata Party (BJP) said in its election manifesto.
The new government may also explore
Ujwal DISCOM Assurance Yojana (UDAY)-II, wherein greater emphasis will be put on technology for reducing theft and improving metering, billing and collections.
Interestingly, of India’s installed capacity of 349 gigawatts (GW), the peak demand is only 177GW. Peak electricity demand has been low due to precarious finances of some state-owned electricity distribution firms, which prevents them from procuring power of the required quantum.
As of September 2015, the total debt of all state-owned discoms was around ₹2.45 trillion, with ₹0.8 trillion serviced by the states. Also, the annual discom losses in FY16, FY17 and FY18 were funded through borrowings. Aware of the issues at play, the BJP in its election manifesto said: “Now, we will work towards ensuring a right mix of energy which leads towards a cleaner environment, supplying quality electricity to all consumers, making the state electricity entities financially sound and administratively more efficient."