Boost domestic production of oil

Following Russia’s war against Ukraine, there has been a sharp rally in crude oil prices. Crude oil price (WTI) shot up from $92/barrel just before the start of the conflict to above $120/bl.

Those dependent on oil imports remain vulnerable. European countries are realigning their supply-chains. India depends on imports for over 85% of its oil demand. The country also has high Union and state imposts on retail sale of petroleum. High fuel prices have started pinching the common man, not just because of direct usage but also since the costs of all goods have gone up because of increased cost of transportation.

This prolonged conflict could either result in prices averaging $135/barrel against the current domestic cost of production of $40-50/barrel or make Russia negotiate at a low price (as it has offered, $35 lower than international prices per barrel). However, if sanctions interfere with the supply-chain, then the Russian offer won’t mean much. For India, the supply from Russia is a minuscule single-digit percentage; it depends on the rest of the market suppliers for its need. Thus, the oil marketing companies are steadily hiking petrol and diesel prices.

India faces a precarious energy security scenario, with potentially an additional import bill of ~$50 billion. As on date, the annual oil import bill is over $100 billion; this could well become $168 billion at a $115/barrel price in 2023. If the prices continue stay elevated, our import bill could well rise to $200 billion. Thus, it is very important for India to focus on domestic supply and its pricing.

In FY21, the CPI averaged 6.2% when the average crude oil price was around $42/barrel. If oil price stays at the forecasted levels, that can cause serious damage to the Indian economy. Consumers are already seeing holes blown in their pockets as the retail price of petrol has already crossed `100/litre in most cities. The big concern now is that high fuel prices could bring down the growth rate by almost 1 percentage point, as fuel is a key input in most industries and services. India is reeling under a double whammy of sorts—rising energy demand coupled with diminishing domestic production. Crude oil and gas output have been on a decline since FY21, and data for the first 11 months of FY22 shows no improvement on that count. The negative growth trend continues with crude oil production down by 2.5%.

Isn’t it time for India to go back to the drawing board and rework its energy strategy? The clarion call of atmanirbharta needs to be the guiding principle to reduce dependence on imports and effectively use local coal, oil and gas. Import replacement by increasing domestic oil production with forward-looking policies is the only way to bring about much-needed autonomy. Incentivising domestic producers to increase production can enable production of 18 million metric tons of oil in the country, saving ~$10 billion per annum over the current import bill (10% reduction). The focus has to be on enhancing production, along with syngas from coal.

Some corrections in the Mining Act, by adopting the model of Long-Term Production Sharing Contract (PSC) Extension of Oil Blocks for 50 years for better management in terms of planning and reservoir management, are required.

The cumulative levy is 67% if we add royalty, cess and profit of OMCs. On top of that, there are indirect taxes. Efforts are on to augment domestic production through NELP, HELP and OALP. Reduction of fiscal levies from 67% to 40% for pre-NELP blocks if investible surplus is ploughed back for more production through deployment of capital-intensive enhanced recovery technologies is an imperative.

Import parity in the oil & gas value chain by imposing customs duty on crude, on a par with domestic sales tax, to ensure a level playing field for domestic crude could help, apart from bringing in additional revenue of $7 billion.

New fields have long gestation periods. To bring down the cost, a twofold approach is needed. One, rework the tax for the pre-NELP blocks that today constitute the bulk of domestic production along with reduction in multi -mode royalty; two, reduce the indirect tax on consumer for an year.
PSC blocks like HELP need to have freedom in marketing for better realisations from domestic crude. This will also enhance the revenue collection to tune of nearly $80 million.

For faster unlocking of hydrocarbon-in-place, there is a need to shift to self-certification, quite in line with push to Ease of Doing Business.
As crises in the neighborhood—in Sri Lanka—have shown, energy is the life blood of economic stability, and the only way to emerge as a true superpower is by attaining energy security through policies promoting use the domestic resources and creating a ecosystem to accelerate production. The dilemma and delay in course correction will make the situation more critical.