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Battling blackouts

Oilfield Technology,

Forget about the world being awash in oil, gas and coal supplies, India fears it is running desperately low on all three fuel sources which meet more than 95% of the nation’s primary energy needs.

Due in large part to mismanaged energy policies, Asia’s third largest economy is at risk of being crippled by worsening power blackouts, record energy import expenses, an incurable addiction to unsustainable domestic fuel subsidies and the growing loss of business confidence.

With Europe hogging the doomsday headlines, India’s rapid economic slide has been less eye-catching but no less significant. Last summer’s three day power blackout affecting a world record 700 million people, or more than half the Indian population, plunged the nation’s energy crisis to new depths. Its rising massive oil and gas import bills have helped sink the rupee to record lows, and raised India’s current account, fiscal and trade deficits to new highs.

Citing the nation’s worsening power outages and unclear economic prospects, businesses are cutting back on their investment plans. Power companies, in turn, blame the government of Prime Minister Manmohan Singh for refusing to let them raise tariff rates to pay for the high cost of oil, gas and coal feedstocks. Similarly, oil companies face mounting losses from having to subsidise domestic fuel sales while having to pay high international prices for crude.

A reformist Finance Minister in the early 1990s, the 80 year old Singh has passively watched India’s energy crisis morphed into an economic disaster since becoming Prime Minister in 2004. Last year, India’s economic growth plunged to a 10 year low of 5% after years of 7 - 8% expansions. Growth has briefly rebounded, but India’s record account, trade and fiscal deficits from its rising energy expenses have become serious threats to long-term economic recovery.

The current state of economic turmoil and political malaise leaves India in a weak position to compete against Asia’s other major economies of China, Japan and South Korea for oil, gas and other natural resources around the world. The man who saved the Indian economy from the Gulf War-induced oil shock of 1990-91 is now seen as paving the way for its decline through failed energy policies.

India’s growing oil burden

The government spent nearly Rs. 970 billion on oil product subsidies in the last financial year ending March 2013, more than 120% what it had originally budgeted for.

With this year’s fuel subsidy spending set to exceed Rs. 1 trillion for the first time, the Petroleum Ministry expects the country’s main downstream companies to forgo collecting a combined record sum of at least Rs. 1.67 trillion from selling fuel at below market prices, compared with Rs. 1.38 trillion in financial year 2012.

India’s largest state-owned oil company, ONGC, will be on the hook for nearly a third, or more than Rs. 550 billion, of that amount. To put this into perspective, the company’s subsidy burden of nearly Rs. 444 billion last year far exceeded its net income of Rs. 251 billion, effectively hampering its expansion and ability to acquire upstream assets in other countries.

The vision for India to become a major oil products exporter is running up against a reality check of its rising oil trade deficit.

In earning US$ 70 billion from oil product exports last year, India had to import nearly US$ 170 billion worth of crude, resulting in a record outflow of nearly US$ 100 billion which accounted for more than half the country’s merchandise trade deficit of nearly US$ 190 billion. The oil trade deficits of US$ 85 billion and US$ 62 billion the previous two years were part of a recent trend that contributed to the rupee’s value plunging from 40 to the US dollar in 2008 to a new low of 57 in 2012.

While not helping India’s inefficient export sector, the weakened currency has ignited domestic inflation as well as hurt its current account and fiscal balances by raising the cost of imports and straining government finances.

Crisil, India’s main credit ratings agency, has warned that the country’s current account deficit will remain high and could rise further if already well-supported global oil prices surged. Tracking its oil expenditure, India’s current account deficit deteriorated sharply from a manageable 1 - 2% between 2006 and 2008 to a record 6.7% in late 2012.

Some of India’s leading businessmen recently told a deeply worried Finance Minister P. Chidambaram that they will hold back expansion plans unless the government is able to fix the country’s energy mess and anti-business environment. Until those investment flows resume, the Indian economy is unlikely to again experience 6 - 8% growth rates.

Oil demand to grow

India’s oil products consumption will grow by 4.9% in the current financial year to March 2014, predicts the planning unit of the Petroleum Ministry.

This forecast could prove conservative as India’s economy is expected to expand by 5.7% this year and 6% in 2014 after slumping to a 10 year low of 5% in 2012.

India’s products consumption will reach a record 155.42 million tpy for FY2013, with diesel use rising 6.8% to 69.2 million tpy, said the Petroleum Product & Analysis Cell. Similar to most of Asia, diesel is the most important fuel in India’s oil market.

Among the major products, naphtha use will rise fastest, by 9.5% to 12.28 million tpy, while gasoline demand will grow by 5% to 15.74 million tpy.

The biggest demand declines will be in kerosene and fuel oil, according to the planning unit. Fuel oil demand will plunge by 13.7% to 7.68 million tpy on account of increased substitution by natural gas for power generation while kerosene use is seen falling by 7.8% to 7.5 million tpy.

Products output is forecast to surge by nearly 7.4% to more than 219 million tpy as a result of the country’s expanded refining capacity. Diesel will continue to lead with its output seen rising by 10.6% from 83.43 million tpy to 92.3 million tpy. Fuel oil production is expected to plunge 17.1% from 17.72 million tpy last year to 14.68 million tpy, said the planning unit.

Bidding for global energy assets

In an attempt to compete against its East Asia rivals, the Indian government is looking to provide full state support as well as co-operate with private Indian companies to acquire and develop global energy assets.

The move is being seriously considered as New Delhi is frustrated by Indian companies’ apparent inability to compete for oil, gas and coal assets against their rivals from China, Japan and South Korea. More embarrassingly, India is also losing out to smaller players such as Malaysia and Thailand.

The East Asian model calls for a strong government role in providing financing and co-ordinating a national approach in identifying and acquiring assets abroad. In contrast, India has left much of the decision making to individual state-owned and private companies, often leading them to compete against each other.

As the world’s fourth largest energy consumer, India is increasingly unable to meet its rising domestic demand for oil, gas and coal. By 2035, its energy demand is expected to more than double to 1500 million toe from 700 million toe now.

India’s dependence on imports to meet its energy needs is expected to surge beyond 80% later this decade, but its companies own relatively few producing assets abroad compared to other Asian countries.

To date, state-owned ONGC, GAIL and Oil India Ltd have invested a total of nearly Rs. 650 billion, or about US$ 11.8 billion, in oil and gas projects abroad. In contrast, China’s main state oil and gas companies have invested a total of US$ 100 billion between 2009 and 2012.

Of growing concern is that India’s overseas oil and gas assets are in decline. ONGC’s subsidiary ONGC Videsh Ltd (OVL), is expected to produce less than 6.9 million toe this year, down from 8.8 million toe on account of its exposure to troubled Syria and South Sudan.

Despite these setbacks, ONGC Chairman and Managing Director Sudhir Vasudeva has set an ambitious target for the company to produce 28.6 million tpy of crude in the current financial year ending March 2014, a 9.5% increase over last year’s 26.12 million tpy.

India cool on Kazakhstan oilfield, remains warm to Iran

The government’s new thinking for a united ‘India Inc.’ approach to compete for overseas energy assets may have been helped by ONGC’s offer to pay US$ 5 billion for an 8.4% stake in Kazakhstan’s giant offshore Kashagan oilfield. Critics say the deal will add to ONGC’s rising debt load while yielding only marginal value. Last November, ONGC announced that its upstream subsidiary, OVL, had offered to acquire ConocoPhillips’ stake in one of the world’s largest oilfields with reserves estimated at 30 billion bbls.

New Delhi has been conspicuously lukewarm in supporting the bid which has already been approved by Kashagan’s consortium partners Italy’s ENI, Royal Dutch Shell, Total, ExxonMobil, Japan’s Inpex, and Kazakhstan’s state-owned KazMunaiGaz. Apart from Inpex, which holds a 7.56% stake, the other members each own a 16.8% share in the project.

Some Indian officials believe ONGC would be better off investing in Mozambique’s emerging offshore fields and North America’s booming shale sector than buying into a troubled project that has been repeatedly delayed by costly overruns, partnership disagreements, and disputes between the Kazakhstan government and the consortium members.

In lobbying for the deal, ONGC said the Kashagan acquisition, its biggest to date, would add an average 20 000 - 32 000 bpd to the group’s annual oil production over 25 years. ONGC had expected to reap immediate benefits based on forecasts that the field would begin producing 370 000 bpd of light crude oil from early 2013.

However, ratings agency Moody’s had earlier warned that cash-strapped ONGC’s credit rating could turn negative as the proposed acquisition by subsidiary OVL would be funded with debt and increase the group’s consolidated net debt by at least US$ 5 billion.

India’s main state-owned upstream firm has been struggling to generate positive free cash flows after spending a record US$ 7.5 billion on projects for the year ended March 2012. With only US$ 145 million in free cash flow at the end of March 2013, ONGC is also obligated to pay a hefty 30 - 35% share of India’s costly fuel subsidy programme that is expected to top US$ 40 billion for the current financial year to March 2014.

With few major alternative suppliers, India said it would continue to import oil from Iran, defying Western threats to punish those who continue to trade with the Islamic regime.

Petroleum and Natural Gas Minister M. Veerappa Moily said the Indian government would protect the supply line by providing insurance to refiners processing Iranian crude who were recently told they would no longer be covered by domestic and European insurers.

Last July, the EU and the US implemented tougher trade sanctions against Iran in the hope of bankrupting the regime for pursuing its nuclear development programme that the West and Israel said are a disguise for producing weapons. Some of the measures, passed without UN approval, aimed directly at stopping Iran’s oil and gas exports, mostly to customers in Asia. Most countries appealed against the sanctions, and were given temporary reprieve by the US and Europe to continue their imports from Iran.

In the latest attempt to disrupt Iranian oil exports, European re-insurance companies, under pressure from their governments, said they would no longer provide coverage to Indian insurers for the country’s refiners processing crude oil from Tehran.

The Indian government responded swiftly by announcing that its state-owned oil and gas companies, insurers and the Oil India Development Board would set up their own insurance fund. India’s oil imports from Iran are expected to drop from more than 360 000 bpd last year to around 250 000 bpd of crude in 2013.

Like other buyers of Iranian crude, India has found it tough to secure tankers and insurance to import from Iran over the past year.

This is an abridged version of an article published in the July 2013 issue of World Pipelines, available for subscribers to download now

Written by Ng Weng Hoong

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