India/Oil & Gas Establishing Local Upstream Industries – Trends on India's Oil and Gas Market
India, being one of the fastest growing countries, registers high oil demand. However it is highly dependent on imports when it comes to oil requirement. Developments like RIL's KG D6 offshore field and shale gas projects could not fulfil the expectations, market experts say. PROCESS takes an outlook towards the trends on India's oil & gas upstream industry – can local upstream industries help to turn the tide?
Domestic oil and gas production dipped five per cent year on year to 86 Million Metric Tonnes of Oil Equivalent (MMTOE) in FY 12 on the back of nine per cent degrowth in gas production to 47.55 Billion Cubic Metres (BCM) following disappointments in Reliance Industries Limited’s (RIL) flagship KG D-6 block and tepid one per cent growth in crude oil production to 38 Million Metric Tonnes (MMT). Oil and Natural Gas Corporation Limited (ONGC) continues to dominate India’s Exploration and Production (E&P) landscape, accounting for approximately 55 per cent of total Oil and Oil Equivalent Gas (O+OEG) production while Oil India Limited (OIL) accounts for eight per cent and various private companies/Joint Ventures (JVs) together account for 37 per cent (FY 12).
An outlook towards Indian oil & gas upstream industry
Notwithstanding the expected modest increase in domestic crude oil production over the medium term, driven mainly by ramping up of scale by Cairn India Limited (CIL) at its Barmer block in Rajasthan and commercialisation of small to marginal other discoveries, India is expected to remain an energy deficit country with imports accounting for 76-77 per cent of total domestic crude oil demand.
The import bill on account of crude oil swelled to US$98 billion in FY 12 from US$64 billion in FY 11 due to spiraling crude oil prices and increase in volume of imports. The situation further led to the sharp increase in the country’s trade deficit. Given the inelastic demand for crude oil, the global energy price scenario would continue to remain a key determinant of the country’s import bill and in turn its trade deficit.
Following the dip in RIL’s KG-D6 gas output, the Indian market has become gas starved, which has further resulted in increase in imports of Regassified Liquefied Natural Gas (R-LNG) – despite the high costs thereof (average LNG rates of US$15-16/MMBTU vis-à-vis domestic gas prices of US$6-7/MMBTU on landed basis).
Petrochemicals and Fertilizers Govern India's Gas Market
Considering the high potential demand of gas from various sectors – particularly power; fertilizers and petrochemicals and the modest expected domestic supply additions, – the gas deficit in the Indian market is expected to further balloon over the medium to longer term part of which can be catered to by increased LNG imports – while a larger portion is likely to remain unfulfilled due to high price sensitivity of certain end user sectors.
Policy environment for the exploration and production sector remains not so favourable with prevailing uncertainties on the role of the regulator in areas of pricing and allocation of hydrocarbon resources; granting of approvals and various clearances; and interpretation of the terms of the Production Sharing Contracts (PSCs) and other framework agreements.
These factors have led to a dampened investment climate, which is already facing challenges of increasing capital costs; increasing risks due to more complex and difficult geology and high operating cost pressures.
Analyst See Little Potential Shale Gas In India
Efforts on development of non-conventional hydrocarbon resources such as Coal Bed Methane (CBM) and shale gas have also been uninspiring and with various structural uncertainties still existing, these are unlikely to become major contributors to the country’s energy security in the foreseeable future.
International Price Movements Drive Private investments in Oil and Gas
The buoyancy in global crude oil prices and linkage of domestic crude oil realisations to international oil price movements has translated to superior profitability and high cash generation for the private sector E&P players. Their public sector counterparts namely ONGC and OIL have however been unable to capitalise on this upside fully due to the large under-recovery sharing burden imposed on them by the Government of India.
Indian Oil Fields Can Not Live up to Expectations
The underrecovery burden for FY 12 stood at `1,385 billion, up sharply by 77 per cent from the level in FY 11. Notwithstanding the recent softening, crude oil prices are likely to remain at elevated levels over the foreseeable future, which will keep the under-recovery burden high. The extent to which this would have a bearing on the profitability and cash flows of public sector upstream companies shall continue to be a function of Government of India policies with respect to underrecovery sharing.