White Paper Study

INDIA’S ENERGY (IN) SECURITY

EXECUTIVE SUMMARY • Highlights:

▫ Importance of India’s energy security ▫ Possible repercussions of Government’s policy paralysis, which is

hurting the endeavors of energy firms

• India’s energy security is not attributed and confined to just oil & gas industry, whose role cannot be denied in India’s overall growth story.

• It has become critical for India to introduce policy reforms to secure India’s growing energy needs. Starting from making the present Production Sharing Contract (PSC) structure more remunerative for the investors, to rationalizing the taxation regime for the sector, changes are indispensable.

• Biggest hurdle currently: The sector’s slow decision-making process

• The dwindling interest of foreign investors and their exodus are big concerns, especially at a time when India needs them and the technology they possess.

INTRODUCTION• India’s 12th Five Year Plan Economic scenario does not look very

encouraging

• Fluctuating crude price, on which India’s dependence is precariously high at ~80% currently, is increasing the uncertainties

• Despite crude prices showing signs of relief, the depreciation of Indian Rupee vis-à-vis US Dollar is not helping

• This also underlines the issue of India’s growing dependence on energy. Analysts believe that situation will not change much, be it high crude prices or lower valuation of Indian currency

• Neither of the problems augurs well for Indian economy

QUESTION:

So, then what are the possible options we have? How do we navigate through the crisis?

OPTION 1• Reduce imports and solve both the problems. With the population,

substantially over one billion, and growing energy demand this is not a policy solution.

Table 1 highlights the precarious Indian situation.

TABLE 1: Proved Reserve at the end of 2011 Country

Thousand MnTonnes

Thousand Million Barrels

Share of Total (%)

US 3.7 30.9 1.9Canada 28.2 175.2 10.6Mexico 1.6 11.4 0.7

Venezuela 46.3 296.5 17.9Kazakhstan 3.9 30 1.8

Russia 12.1 88.2 5.3Iran 20.8 151.2 9.1Iraq 19.3 143.1 8.7

Kuwait 14 101.5 6.1Saudi Arabia 36.5 265.4 16.1

Qatar 3.2 24.7 1.5UAE 13 97.8 5.9

Gabon 0.5 3.7 0.2Libya 6.1 47.1 2.9China 2 14.7 0.9

Malaysia 0.8 5.9 0.4India 0.8 5.7 0.3

(Source: BP Statistical review 2012)

OPTION 2• Maximize self-sufficiency? This perhaps is one of the more sustainable

options

• Though India has the 4th biggest reserves of coal & is the 2nd biggest coal producer, petroleum sector still continues to play a pre-eminent role in meeting the energy requirements of the country. 45% of the total energy needs are met by oil and gas

• With economy expected to grow between 7%-9%, energy consumption is set to increase (see Table 3). Other sources of energy will remain important (see table 2), but Petroleum sector is crucial in determining India’s energy security

(Sources: Planning Commission 2012)

TABLE 2: Energy Source Mix (%)

Year Coal Oil Gas Hyde

l Nuclea

r

2010-11 53 30 14 2 1

2024-25 50 25 20 2 3

TABLE 3: Per capita Energy consumption (million tonnes of oil

equivalent)

Country/Region

World 1.5India 0.4China 0.9

North America 6.3Europe 3.3

Russian Federation 3.4

Rest of the World 0.8

(Source: BP Energy Statistics 2012)

OPTION 2

Maximizing self-sufficiency through

▫ Increasing the exploration activity in the country▫ Bringing in more technology and liaison with mature countries in the

oil & gas sector, like Norway▫ Inviting more foreign investments and making the environment more

investor friendly

Needless to mention, for all these India needs – bureaucracy, polity, tax regime working in tandem to achieve nation’s energy security.

382 MTOE*

525 MTOE*

India’s energy consumption

2nd half of the last decade

*MTOE: Million Tonnes of Oil Equivalent

HURDLES IN INDIA’S ENERGY SECURITY

• Bureaucratic and political hurdles : Domestic production stagnated

• Lower indigenous production and exploration: Fizzling NELP

• Energy security vs. national security : Defence hurdles

• International force: Fear of supply disruption

• Gas imports and international negotiation

• Overseas merger & acquisitions: Chinese aggression

• Non-remunerative taxation regime

• New technology for new source of energy – CBM, Shale Gas, Oil Sand, etc.

• Interrelated policy framework for upstream, midstream and downstream

ACHIEVING ENERGY SECURITY

• India’s energy demand is growing by about 7%

• Based on the growth rate, International Energy Agency (IEA) estimates India may need to invest $800 billion by 2030 for meeting its demand

• What makes this imperative is the fact that India’s annual production is 2.3% of world energy production, but India’s consumption is 3.3% of the world energy supply

• The deficit is estimated to surpass Japan and Russia by 2030 placing India in the third position in terms of annual energy consumption.

1. Growing imports with growing economy: Domestic production stagnates

FACT

• India:▫ Domestic production stagnated to around 33-35 MMT▫ Imports have gone up from 120-142 MMT between 2007-11

Clearly, domestic production remained flat, probably because of slow pace of decision-making, bureaucratic hurdles, limited prospectivity, delays in commissioning of new projects and declining production from existing fields (See Table 4).

TABLE 4: India’s import vs. domestic oil production

  MMT Domesti

c Impor

ts

%imports dependenc

e (BCM)

Domestic

% Growth

2006-07

O I L 34 121 72G A S

31.7 -1.4

2007-08

 

34.1 128 73.4

 

32.4 2.1

2008-09

32.8 1.333.5 133.6 75

2009-10

47.4 44.6# 33.7 137.8 75.6

2010-11*

52.2 9.9538 142 73 (Source: Petroleum Planning & Analysis Cell)

* Cairn-ONGC Rajasthan production started #KGD-6 gas production starts

1. Growing imports with growing economy: Domestic production stagnates

REASON

• Delay in approvals to the already discovered fields. ▫ Example: Cairn-ONGC JV in Rajasthan. Indirectly, the bureaucracy & politics

held back the decision on allowing ramp up from Barmer oil block, by almost an year. Timely approval for ramp-up in Rajasthan would have reduced oil imports and save forex reserves.

• Crucial time and money was lost • Many of the oil blocks await approvals from DGH/Petroleum Ministry/Other

Ministries • Exploration in many of the pre-NELP and NELP blocks stopped because of hurdles

Annexure 1

REMEDY

• PMO principal secretary has formed a group to resolve inter-ministerial issues. Annexure 2

• The inter-ministerial group is focused on petroleum sector. Steps in such direction would surely help

• PMO should make sure that the petroleum ministry will expedite the clearance process

2. Lower indigenous production and exploration: Fizzling NELP FACT

• No significant increase in exploration expenditure in NELP blocks (See Table 5) • No significant increase in investments seen, despite few big discoveries in some of

the NELP blocks • Under NELP-IX committed investment in the awarded blocks is about US$582.29

million • Thus significant dip between NELP 8 and 9

Table 5: No significant growth in exploration capex

$ Mn 2006-07 2007-08 2008-

09 2009-10 2010-11 Total

NELP- I -VIII

1168.53 1625.6 1857.9 1942.05 2293.9 8888

(Source: Petroleum Ministry Data, 2012)

2. Lower indigenous production and exploration: Fizzling NELP REASON

• NELP was meant to attract global energy giants but India’s low prospectivity is a deterrent (see table 1)

• Experience of global giants in Indian E&P sector: some example s▫ Bureaucratic hurdles in BP’s $7.2 billion investment to pick up stake in RIL’s

assets ▫ Vedanta faced 16 months delay for acquiring majority stake in Cairn India ▫ Delays in approvals finally forced ENI to minimize its operation ▫ BHP Billiton NELP blocks have issues with Defence Ministry clearances

• Investors don’t get a smooth exit route• Production sharing contract is regressive and confusing in nature• Long process for allowing investors and technology experts, if they want to invest• Arbitrary rules for clearances

2. Lower indigenous production and exploration: Fizzling NELP REMEDY

• PMO* principal secretary has formed a group to resolve inter-ministerial issues. Annexure 2

• Petroleum Ministry/DGH# should make sure that before the block is offered for NELP** rounds, all the negotiations and clearances are in place

• Move towards the Open acreage system

• DGH should complete the national data repository soon to make the open acreage bidding possible

• Change in the PSC. Annexure 4

• Exploring various contract models with a view to minimize monitoring of expenditure of the contractor without compromising, firstly, on the hydrocarbons output across time, and secondly, on the Government’s take Annexure 4

*PMO: Prime Minister’s Office **NELP: New Exploration Licensing Policy (international bidding rounds of oil & gas blocks in India) #DGH: Directorate General of Hydrocarbons (Technical advisory wing of Petroleum Ministry)

NATIONAL SECURITY vs. ENERGY SECURITY • India’s endeavor to minimize dependence on imported hydrocarbons is

facing hurdles from Defence Ministry

• For the two blocks - MB-DWN-2010/1 and MB-OSN-2010/2 – that were offered in NELP-IX, MoD is yet to give clearance

• Empowered Committee of Secretaries (ECS) too was helpless as Ministry of Defence (MoD) clearance for the blocks has not come as yet

•Offshore Defence Advisory Group (ODAG), under the MoD, is restricting any seismic surveys

• Cairn asked for invoking force majeure

• After a sunk cost of $30 million, now 40% of the block falls in a prohibited zone (as per MoD)

• The block falls near the missile testing range in Sriharikota

NEL-IX BLOCKS: MoD in action

BLOCK: PR-OSN-2004/1 (Cairn India bagged the block under NELP-VI)

• Defence ministry withheld clearances for all 10 blocks operated by BHP

•As per Defence Ministry all 10 blocks are inside Naval Exercise Area

•GVK Group of India is partner of BHP in these blocks

WEST COAST: ALL BLOCKS OF MINING MAJOR BHP UNDER

THREAT

NATIONAL SECURITY vs. ENERGY SECURITY The Blocks in question: • NELP VII Blocks: KK-DWN-2005/1, MB-DWN-2005/2, MB-DWN-2005/2, MB-DWN-

2005/3, MB-DWN-2005/4, MB-DWN-2005/5, MB-DWN-2005/7, MB-DWN-2005/9 • NELP VIII Blocks: MB-OSN- 2009/3, MB-OSN- 2009/6 and MB-OSN- 2009/7

• Clearances from MoD were held up for four blocks meant to be offered under NELP-IX

•DRDO says they are in the rocket flight path from the missile test range in Machalipatnam

•RESULT: So much so all the blocks were NOT OFFERED in the NELP-IX round

EAST COAST: DEFENSIVE HURDLES • In 16 exploration

blocks of Eastern offshore, 60 oil and gas discoveries made so far

• 25 major E&P companies are operating in the Eastern offshore with an exploration commitment of Rs 31,500 crore

FUTURE OPERATIONS

• 100 major missions of national importance & this work cannot be compromised

• Andaman: ideal missile launch location

• Machlipatnam (AP) is of strategic importance

•DRDO says it has made it clear that it’s not possible to give long notice period on a missile launch due to technical complexities and secrecy involved

DEFENCE MINISTRY

NATIONAL SECURITY vs. ENERGY SECURITY Exhibit 1

EAST COAST: LOST OPPORTUNITY

· Estimates: Out of 6.40 lakh sq km in Exclusive Economic Zone (EEZ) off eastern coast, 3.75 lakh sq km is where DRDO is putting hurdles

· Andaman offshore: Out of 6 lakh sq km (High prospects) DRDO’s restrictions reduced exploration by as much as 1.42 lakh sq km

· Due to high prospectivity petroleum companies are more keen for East coast

HISTORY

In 2005, DRDO asked to set up exploitation and extraction equipment at the seabed (remember there is no technology in the world that would ensure that all exploration facilities could be seated at the seabed)

NATIONAL SECURITY vs. ENERGY SECURITY Exhibit 1

IMPACT

· DRDO’s "danger corridor" covers virtually the entire East Coast, leaving little scope for carrying out exploration activities · Major international E&P companies such as ENI, NIKO, BHP Billiton, Cairn Energy, British Gas, British Petroleum have entered India through liberal Foreign Direct Investment (FDI) in NELP (New Exploration Licensing Policy), but are now finding it difficult

FINANCES - Estimates show that earnings of about Rs.8.55 lakh crore (at $80/barrel) in next 15-20 years is at stake. Plus nine new oil & gas fields are being developed in this area with an expenditure of $16,275 million and likely to generate revenue of Rs.9.69 lakh crores in the next 20 years

ONGOING OPERATIONS • Existing field: Ravva, PY-1, PY-3 and KG-D6 is being continuously bullied from Defence Ministry • These fields currently produce60.68 MMSCM of gas per day out of India’s present production of 140 MMSCMD of gas • These fields have estimated hydrocarbon reserve of 693.12 MMT (recoverable reserves of 337.023 MMT

CRUDE REALITY • India:

▫ Highly dependent on crude supplies from Middle East & North Africa

▫ Accounts for 60% of supplies to India▫ Geopolitical volatility in the regions is a cause for

concern for India

Automatically trigger a drop in crude production resulting in increased crude oil imports and higher prices in turn driving inflation in India.

REMEDY• Expedite domestic exploration and production

• Lower dependence on Middle East and North Africa

• Look at other supply sources

• Increase the percentage of gas in India’s energy mix

INDIA’S TOP CRUDE OIL SUPPLIERS

· Saudi Arabia: 27 MT · Iran: 19 MT · Iraq: 15 MT · Nigeria: 13 MT · Kuwait: 12 MT · UAE: 11.5 MT · Angola: 9 MT · Venezuela: 7 MT · Oman: 5 MT · Qatar: 5 MT · Egypt: 3 MT · Malaysia: 2.5 MT · Brazil: 2.5 MT · Ajarbaizan: 2.2 MT · Mexico: 2 MT · Russia: 1.6 MT · Ecuador: 1.2 MT · Libya: 0.9 MT

Exhibit 2

More than 30% of India’s gas demand not

fulfilled

Domestic production has not delivered as per expectations

Situation getting grimmer

STEP ON GAS

• Other problems include :▫ Delayed/failed negotiations for international pipelines (IPI: Iran-Pakistan-India

pipeline)▫ Problems in sourcing long term LNG▫ Competition from China, Japan and South Korea that have smoother decision

making process compared to India▫ Diplomatic & bureaucratic failures in Qatar and even IPI▫ Even price issues delayed TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline ▫ Limited LNG import infrastructure in the country and concentrated only in

western India Goldman Sachs study shows increase of $10/barrel can lower the GDP growth by 0.4%. Also

higher oil prices result in outgo of forex reserves impacting India’s trade deficit.

REMEDY

• Petroleum ministry’s “International Cooperation” wing should be strengthened • At the time of Mani Shankar Aiyar’s tenure as minister, a special wing focused just on

international opportunities was created. It should be revived (under an IFS officer) • REGULATED domestic gas prices acts as a major deterrent

FOCUS ON OVERSEAS M&A

REMEDY • Petroleum ministry’s “International Cooperation” wing should be

strengthened

• At the time of Mani Shankar Aiyar’s tenure as minister, a special wing focused just on international opportunities was created. It should be revived (under an IFS officer)

• Create a sovereign fund or consolidated war chest for acquiring assets overseas

• Promote public private partnership for overseas M&A

Look for assets in oil & gas rich countries,

apart from diversifying import sourcing countries

Will not able to support

future needs

India’s overall hydrocarbon reserves are

limited

OPTION

• Group of Ministers (GoM) already in place to discuss creation of sovereign wealth fund for energy security

• GoM looking for possibility of creation of a $10 billion sovereign wealth fund

• GoM may consider budget allocation of Rs 4,500 crore as a first tranche towards the fund

Options being Considered:

SOVEREIGN FUNDS The Global Benchmark

SOVEREIGN FUND FOR ENERGY: Push For Energy Security

Create sovereign fund with budgetary allocation

Use forex reserves to create sovereign fund

Use part of surplus cash reserves lying with large

PSUs

Norway: $ 550 bn

Singapore: $ 400 bn Malaysia: $ 40 bn

Saudi Arabia: $ 450 bn

China: $ 400 bn

Qatar: $ 60 bn

Exhibit 3

• 2005: OVL lost out on acquiring 45% in the giant Akpo oilfield in Angola vs. China’s CNOOC (for $2.268 billion)

• 2009: OVL lost out to Sinopec, that acquired Swiss oil exploration firm Addax Petroleum for $7.2 bn 2009: CNPC-CNOOC outbid ONGC for 75% stake in YPF, the Argentine unit of Repsol, Spain ($13-14 billion)

• 2011:OVL lost bid to buy Exxon Mobil’s 25% stake at a deep-sea oil block in Angola (Bid $2.1-2.2 billion) vs. Chinese and Korean

• 2010: ONGC lost out in Algerian oilfield to a consortium led by a Chinese oil firm

• 2010: OVL lost bid for Halfaya oilfield in Iraq to CNPC and Petronas (remuneration five times higher) 2009: OVL lost the Zubair oil field in the first Iraqi round

BITTER EXPERIENCE: CHINESE AGGRESSIONExhibit 4

• In India, the revenue collection is a hybrid system. It is a system where the petroleum companies contribute to government coffers through royalty payment and also through profit petroleum.

Taxing times • Cess increased by Rs.2000/tonne to Rs 4,500

• Service related to oil and gas production brought under service tax net

RATIONALISE TAXATION: GIVE AND TAKE FOR ENERGY SECURITY

Royalties

ONSHORE SHALLOW WATERS

DEEPWATER

Crude 12.50% 10% 5-10%* Natural

Gas 10% 10% 5-10%*

*Royalty on deepwater production is 5% for the first seven years and 10% thereafter

(Source: Petroleum Ministry, 2012)

Income TaxDomestic Companies Foreign Companies

30% +surcharge* 5% on tax + 3% education cess

40% + surcharge* 2% on tax + 3% education cess

*Surcharge is applicable when income is more than Rs.1 cr

(Source: Petroleum Ministry, 2012)

• Discoveries in KG-D6 (for gas) and Barmer block (for oil) revived the investment hopes. However, higher cess on crude production, bringing upstream activities under service tax and taking away tax holiday on gas production certainly are not going to negatively impact the investment sentiments. Exploration is a high-risk activity and it needs sufficient incentive to attract investments.

REMEDY • Income tax should be levied on all E&P companies uniformly

• Service tax on E&P services may continue (move towards GST) but the cess on crude should be reduced

• India’s present form of PSC regime has attracted lot of criticism, especially from CAG, which suggested royalty based contracts

• Seeing India’s need for more investment in the sector the present form of profit sharing under PSC should not be tinkered

• Allow tax benefit uniformly on LNG imports (presently LNG meant for power sector is exempted)

RATIONALISE TAXATION: GIVE AND TAKE FOR ENERGY SECURITY

• After the traditional form of oil and natural gas, the other form that has taken some shape in India is CBM

• DGH is working on data and policy framework for auctioning shale gas assets

• National program on gas hydrate is being conducted with US companies

• Coal blocks for Coal to Liquid has been allocated to Tata and JSPL in Orissa

NEW TECHNOLOGY AND NEW FORM OF ENERGY(CBM, Shale Gas, Oil Sands, etc.)

Interrelated Policy Framework for Upstream, Midstream & Downstream

•Insufficient oilfield technology and services

• Problems with pipeline infrastructure

Non-commercialization of discovery: Inadequate E&P infrastructure

• Lower investment in the past has resulted in inadequate E&P infrastructure in India • India’s gas pipeline density (per sq. km) is one of the lowest leading to lower share of

natural gas in the overall energy mix (10% vs. global average of 24%) • Production of oil and gas remained stagnant (Table 4) • Limited participation from foreign players in NELP rounds • Inadequate infrastructure leading to non-commercialization of discoveries • Out of 60 discoveries in nine NELP rounds since 1999, only two have entered production

phase • Shortage of oil rigs too has played spoilsport

• NELP has provision for charging market discovered price for gas • However, operators have to follow the government determined price • Even under regulation: No uniformity in pricing of domestic gas

REMEDY

• Let the market decide the gas prices • Expedite the national gas grid program (as announced in the Budget) to

enhance infrastructure • The natural gas infrastructure in the country needs an overhaul • Promote more CITY GAS DISTRIBUTION projects and allow market-driven

pricing • More LNG terminals, especially in the East Coast, need to be promoted

SUBDUED GAS PRICING: GOVERNMENT REGULATION KILLING SENTIMENTS

Foreign firms participation in NELP

NELP-VII NELP-VIII NELP-IX

21 10 8

Though hydrocarbon will remain one of the key sources for India’s energy security, policy makers, however, can’t ignore the other sources – viz coal, hydro power, nuclear, and solar.

• In fact, coal is going to play a significant role in India’s energy security. Not just as a big source of fuel (50%), but also because India has huge reserves of coal.

• Within hydrocarbon sector prospect of shale gas and natural gas needs to be identified as soon as possible.

• As far as the present form of allocation and contracts of oil & gas blocks are concerned, India needs lot of changes. It should be appreciated that Rangarajan committee is looking at overhauling the present format of PSC. One big move that India needs to make is the shift from annual auctioning of oil & gas blocks under NELP to open acreage.

▫ For open acreage, DGH needs to finalize the national data repository, so that companies can visit the always open data rooms and can bid whenever they want. This will keep the competition alive and also allow speedy exploration program in the country.

▫ DGH/Government also needs to finalize the terms for shale gas block bidding, so that India can take advantage of the development in the rest of the world.

CONCLUSION…

On regulation front:

• Government needs to stop regulating gas prices and let the market decide the prices. This will make the market more competitive and more remunerative for the investors. Also this will give the much needed impetus to the gas retail sector in the country, which ultimately has the potential to lower the dependence on imports of liquid fuel.

• Focus also needs to be given to the PSU oil companies, who for all these years have contributed to the growth of Energy security of the country.

Overall, India’s energy sector needs a concerted coordination between the departments, and more public-private partnership will do the trick. We should also ensure that foreign companies, such as ENI and mining major BHP Billiton, having deep pockets should get the right platform to drill deep for ensuring India’s energy security.

CONCLUSION…

Thank you !

INDIA’S ENERGY (IN) SECURITY