Foreign funding key for raising domestic oil output
image for illustrative purpose
The domestic oil industry has come into the spotlight in recent days due to two events. The first is the action of Cairn Energy in filing a lawsuit to seize Air India assets abroad and the second is the desperate rescue efforts to save those on barges near offshore installation in the Mumbai High area. In the case of Cairn, it is the operator of several onland oilfields in Rajasthan and has got embroiled in a retrospective tax case. This went to international arbitration and an amount of $1.4 billion was awarded to the firm. The government has gone in appeal to The Hague, but the controversy is not likely to enthuse foreign investors especially in the oil sector.
The second event is linked to barges that were working to support offshore oil installations that have been the main source of domestic oil supplies. The Mumbai High offshore oilfield is the area that in the 1970s was expected to yield enough crude to ensure self-sufficiency in oil. Now, however, these fields are aging and yielding less every year. Other onshore oilfields in Gujarat, Assam and Rajasthan are also not producing enough to make up the shortfall in domestic availability. The net result is that import dependence has gone up over the years from 81 per cent in 2012 to about 87 per cent in 2020. Domestic oil output had risen as high as about 37 million tonnes in 2014-15, but has now fallen gradually to reach slightly over 30 million tonnes in 2020-21.
The present government had set a target in 2015 of trying to reduce reliance on import dependence by 10 per cent. At the time, it was about 80 per cent of total consumption. Since then, however, import dependence has only grown further. The reasons are numerous. First is the fact mentioned earlier that existing oilfields, especially in the Mumbai High offshore areas as well as Gujarat onshore regions are now aging and depleting. In fact, there is a school of thought arguing that efforts should not be made into drawing from these resources. Instead, it is suggested that India, as the third major oil importer, should leverage its purchasing power instead to negotiate better prices from global suppliers. This would be, however, a difficult proposition given the fact that there are other bigger importers of oil like China and Japan who have not been able to manipulate the market in their favour.
The second reason for growing oil imports has been the failure to lure global oil majors into investing in oil exploration efforts in this country. Despite the fact that geological surveys have found several prospective areas, both in onshore and offshore blocks, the terms and conditions offered have not proved attractive enough for a significant response to the various exploration licensing programmes. There was some interest at one stage in exploration of deepwater areas, but this was stymied when oil prices began to plateau some years ago. Given the high risks involved in oil exploration especially in deep waters, this activity gets a fillip only when international prices are ruling at relatively high levels. It ensures the exploration agencies are able to obtain adequate returns on their huge and risky investments.
The net result has been that most of the onshore and offshore blocks offered under the earlier new exploration licensing programme and the latest hydrocarbon exploration licensing programme of 2016 have been awarded to domestic companies like ONGC and Oil India Limited (OIL). Besides, there has been a long gap between oil exploration bidding rounds. Domestic oil output has thus been gradually declining over the years. Recently production has also been affected by continuing political issues in the eastern region including the Citizens Amendment Act agitation.
There is no doubt that despite the targets set for achieving greater self-sufficiency, little action has been taken to ensure an increase in domestic oil output. This is apart from efforts to enhance oil recovery from existing fields through use of advanced technology. But any substantial increase in indigenous production can only be achieved by making investments in exploration in prospective onland and offshore areas. This, in turn, requires sizable investments by the global oil majors that have both the required expertise as well as the funds for this purpose. Even the radical changes made in the HELP as well as the Open Acreage Licensing programme have not succeeded in attracting foreign oil companies. The Petroleum Ministry needs to go back to the drawing board and finalise a scheme that is easier to implement and yields adequate returns to the investors. Oil exploration is a risky venture at the best of times. So, unless there is a clear guarantee that terms and conditions are favourable to the investing companies, it is unlikely that any of the major oil companies will be interested in investing in exploration here.
Another factor that is bound to be a disincentive is the situation currently facing Cairn Energy. In such a scenario, it is unlikely that any oil company would seek to make fresh investments in this country. The entire issue of retrospective tax cases needs to be set aside by the government as it has the potential to scare away investors not just from the oil and gas industry but from the entire gamut of industry and services.
The issue also needs to be viewed in the light of the enormous cost of importing crude oil into the country. Though fossil fuels may be sidelined after a few decades, for the time being these continue to be the energy source of choice for most industries. It will take a long time for alternative renewable energy sources to take their place. It is thus high time to take advantage of the prospectivity for oil that has been detected in several geological surveys by making course corrections in existing policies.
