Let’s explore our energy options

The components of India’s primary commercial energy supplies are approximately 55 per cent coal and 32 per cent hydocarbons (oil and gas), with hydro, solar, nuclear, wind and others making up the rest. These two will continue to retain their positions for a very long time. Within hydrocarbons, gas is likely to become a bigger component than oil.

Now that the government has taken a view on gas prices, are there takers for this price? Will exploration be encouraged? Will overseas investors come rushing in? To answer these questions, we need to consider three issues which every oil company including ONGC is likely to take into consideration.

The first is the amount itself. Oil companies are likely to derive comfort on this issue by treating $5.61 per mmbtu (million metric British thermal units) as an entry price with the hope that prices will be market-driven like oil. Also, the gas prices are expected to be revised every six months.

The second issue that comes up are the assumptions on which this price is based. A clear enunciation of the principles and variables on which the present price of $5.61 has been fixed will establish a visible transparency. This, in turn, will help assure oil companies that the goalposts will not be shifted in future while working out the gas price revision. The third issue is to do with the fiscal and legal stability of the contract. An assurance that the terms of the contract will not be changed to the detriment of the company should be forthcoming.

The downside to the gas price announced by government is that there will be two prices for gas in India, one for domestically produced gas and the other for imported LNG.

Over the next two years, the government should not get involved in determining the price; it should be market-driven with the LNG price being the cap. The increasing gap between domestic supply and India’s consumption leads to increased imports.

In order to narrow this gap it is essential to step up exploration of unexplored basins as well as acquiring assets overseas. Acquiring oil and gas assets abroad involves very fine planning with a clear strategy. Before we go further, we need to be clear about the use of the term self-sufficiency in oil.

Self-sufficiency generally refers to control over the inputs which are equal to and satisfies demand. In the case of oil, this would translate to India producing over three million barrels a day to satisfy demand. The actual production is 25-30 per cent of the demand. This supply has remained more or less stagnant for many years, indicating that we have reached the peak and that we are going downhill. India has explored only one-third of its basins and we need to make the terms of exploration more attractive to international oil companies and investors. However, we are still not able to offer attractive terms, much less attract foreign investors to India. If we want ‘Make in India’ to be a reality we need to realign our exploration strategy; we may even get an insight into how countries like Malaysia, Brazil, Mexico and Tanzania attract foreign investors and oil companies.

The government should encourage domestic oil companies to go in for aggressive exploration in the remaining basins in India. Yet to find oil poses a great challenge in terms of high investments, advanced technology and the inherent risks involved in case no oil is found and crores of taxpayers’ money go down the bore-hole. (The normal trend of finding one discovery well for every 4-5 wells drilled could be bettered.) The hard terrain of the Himalayas, the northern hard rock formations of Jammu (Jwalamukhi), deep offshore areas on the western and eastern fronts are some basins in the ‘yet to find’ areas. National oil companies are not well equipped for successful exploration in such areas. Hence there is a case for all exploration ventures, both in India and overseas, to collaborate with a technology driven international company or private sector Indian companies.

If oil can be found at lower cost and brought to India at optimal cost, will it not make sense for Indian companies to look overseas to acquire these assets? While acquiring, the companies would conduct a techno-economic analysis of the potential asset. In the economic model the input costs include the cost of crude oil. The costs are worked out for the period of useful life of the asset which could be anywhere between 10 to 20 years. The crude oil price with/or without an escalation is locked in the model.

What this means is that if the company is successful in acquiring an asset based on its economic model, the oil from that field is available to the company for the next 10 to 20 years at a lower cost as the actual crude price prevailing at the time of dispatch would invariably be much higher!

One disappointing aspect is lack of coordination. Time and again I have seen the Indian Railways offering to build train tracks and supply locomotives, the Ministry of Agriculture rushing with foodgrain and the Information Ministry setting up IT parks without any coordination with each other.

Had we marshalled all these efforts under a single umbrella, we could have ensured a deal for ONGC to be offered blocks on nomination basis but on commercial terms. How does China go about when scouting overseas? They coordinate all efforts under a single banner.

When it comes to shale oil, it is difficult to extract, is cost intensive and has a lot of environment-related issues, but the rewards are enormous especially for shale gas. The US and many other countries have gone in for shale gas in a big way. India should not lag in this area.

The writer was the executive director of ONGC Videsh