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The agenda for Petroleum Minister Hardeep Singh Puri
The spread and speed of the destruction caused by climate change in recent weeks present our new Minister of Petroleum and Natural Gas with a policy dilemma, if not a moral one: How to redefine the supply-side priorities of his Ministry in the face of the imperatives of atmanirbharta with the starkest evidence yet of the consequences of continued dependence on fossil fuels. This article offers five suggestions to help crack the conundrum.
The events of the past month have caught even the most alarmist of climate scientists by surprise. In China, 1.2 million people were displaced in the province of Henan by what was reported as a “once in a 1,000-year downpour”. In Russia, the Siberian city of Yakutsk, better known for its subzero winter temperatures faced the “worst-ever air pollution” because of smoke from 200 nearby wildfires. In Europe, flash floods killed approximately 200 people in Germany and Belgium. And in North America, city after city was scorched by unprecedentedly high temperatures.
These events brought into sharp relief the reality that there was no ducking the consequential implications of the “fossil fuels as usual” scenario. This reality offers, however, cold comfort to the Minister of Petroleum. This is because the Indian economy is dependent on fossil fuels and there is no discernible end in sight to this dependence. Further, India imports approximately 85 per cent of its crude oil requirements and is exposed to the volatility of the international oil market. There is good reason, therefore, for the Minister to rank the harnessing of India’s indigenous petroleum resources by intensifying exploration as a top policy priority.
My first suggestion is that he should review this ranking and that the government should scale back its emphasis on domestic exploration. I make this suggestion because I believe the resources earmarked for exploration can be deployed more productively elsewhere. A review of the public sector’s exploration and production (EP) track record suggests that whilst India may well be sitting on substantial hydrocarbon reserves, as is claimed by our petroleum scientists, these reserves are not easy to locate and, even when located, difficult to develop and produce on a commercial basis. There have been few substantive commercial discoveries in recent years, in large part because the bulk of the reserves are in complex geological structures and harsh terrain (Himalayan foothills or deep waters offshore). They are difficult to find but even when found, the costs incurred are often so high that except in market conditions of high prices, the discovery is not commercially viable. The government has often compounded this economic challenge by placing administrative limits on marketing by companies and their pricing freedom. The fundamental point is that EP in India is a high-risk activity, and this risk is even greater today because of the longer-term structural softness of the petroleum market. There is good reason to question the expending of public resources on wildcat exploration.
Flowing from this contrarian thought, my second suggestion is that ONGC allocate increasing resources to improving the productivity of its producing fields. Years ago, when I was part of the petroleum industry, the average oil recovery rate in India was around 28 per cent. That is, for every 100 molecules discovered, only 28 were monetised. This number did not compare well with the global average of around 45 per cent for fields of comparable geology. The recovery rate may be better today but if there is still a wide gap, the application of enhanced oil recovery (EOR) technology offers a relatively low-risk avenue for increasing domestic production. ONGC might have to shed a part of its equity in its ageing crown jewel, Mumbai High, to get the best technology service partner.
The consequential increment in production from EOR will not materially reduce our vulnerability to unexpected supply disruptions. Pre-Covid, we imported approximately 4.5 million barrels of oil, of which 50 per cent or so came from the Middle East, predominantly Saudi Arabia, Iraq and Iran. This region faces deep political and social fault lines and there is no knowing when our supply lines might get ruptured. We would, therefore, be well-advised to build contingency safeguards. We hold currently strategic reserves equivalent to 12 days of imports. The government has approved plans to increase this buffer to 25 days. By comparison, China, the EU, South Korea and Japan hold between 70-100 days of reserves. We do not need to create such a large buffer, but I would suggest we increase it to around 35 days equivalent. This should be done by constructing a cavern in Jamnagar, the entrepôt that receives approximately 60 per cent of our crude oil imports and is well connected through tanks and pipelines to the hinterland refineries.
My fourth suggestion is to restructure and reorganise the public sector petroleum companies. In the first instance, the upstream assets should be consolidated under ONGC (the upstream assets of BPCL, IOC, HPCL, and GAIL should pass onto ONGC) and GAIL should be unbundled into a public utility gas pipeline company (its non-pipeline assets should be allocated to the upstream company and/or one of the downstream entities). Thereafter, these companies should be encouraged to look beyond hydrocarbons to build an “energy” enterprise. I believe this restructuring will help cut back the “avoidable” costs of intra public sector competition, reduce the inefficiencies of “sub scale” operations and provide a focused platform for balancing the shorter-term need to provide secure and affordable hydrocarbons with the medium and longer-term imperative of developing clean energy.
My final thought: The petroleum minister should not, in the current context, see his responsibility through the siloed prism of oil and natural gas. He should broaden the aperture and become the progenitor of the energy transition. The dilemma referred to in the opening sentence will be easier to resolve if he develops his priorities within the framework of clean energy and in collaboration with his cabinet colleagues.
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