Opinion

Challenges ahead for oil and gas sector

DC Patra/Jitendra Asati | Updated on January 24, 2021

While the industry in India is set for V-shaped recovery, it will have to move towards creating a cleaner fuels market

In 2021, the oil and gas industry in India has an arduous task of helping the economy revive quickly, while negotiating the headwinds of global recession, protectionism and geo-political upheaval. Positive signs of recovery and growth were visible in the fourth quarter of 2020, as fiscal and monetary stimuli provided by the government got translated into enhanced government and private expenditure.

Further, the oil industry will steer its drive towards universal accessibility, availability and affordability while adopting de-carbonisation and digitalisation. The oil and gas industry, in the public, private and joint sectors, is ready to welcome 2021 with resolve of a service industry, armed with resources of the mining industry and technology of the IT industry.

Structural challenges

Indian oil and gas industry leaders are faced with the twin challenge of responding to the changing environment, while managing their enterprise level shake-up and internal resources, including human resources (see Graph 1).

 

Demand for oil and gas is relatively price inelastic and much more responsive to shifts in trend regarding income, and by extension, fiscal stimulus, tax incentives and other economic drivers; all these will play out in 2021.

The volume of oil and gas consumption in 2021 is estimated to bounce back to 2019 levels (Graph 2). The consumption in 2020 witnessed a slump of 10 per cent and 2021 will recover by 12 per cent, displaying V-shaped recovery.

 

The estimation of consumption of oil and gas assumes that resumption of economic activity seen in the last quarter of 2020 will be sustained; fiscal and monetary measures aimed at reviving investment and consumption expenditure will continue; and vaccines will be rolled out in January 2021.

The natural gas market will be watched as it leverages the new pricing methods, reforms measures undertaken with regard to marketing and the second wave discoveries in KG D-6 block to come on stream. India 2021 will move a step closer towards gasification of the economy, by way of more gas flowing through gas pipes and more kitchen lit with clean fuel.

As India imports above 50 per cent of its gas consumption, global LNG demand grew by 2 per cent in 2020 to around 362 MMT; is likely to grow by another 3 per cent in 2021.

India’s 2021 LPG consumption is estimated to touch 28.7 MMT, 1.3 MMT higher, year on year, with imports around 16 MMT. India's LPG demand and imports are each forecast to grow 1-2 per cent in 2021, as penetration has surpassed 99 per cent by end-2020.

Likely policy developments

Import duty on LNG may come on par with that on crude oil. It may be reduced to zero (currently 5 per cent in general and zero for power), without end-use condition.

There will be a Transport System Operator (TSO) to manage access to common carrier gas pipelines. It will have a transparent digital system of booking pipeline capacity. Further, PNGRB (Petroleum and Natural Gas Regulatory Board) is envisaging unified tariff structure for more than a dozen pipelines, putting fixed tariff for the first 300 km from the source of gas and another tariff for beyond, on the same integrated pipeline network.

India’s gasoline will find export markets in the Asian region. Asia’s gasoline demand will bounce back in 2021 driven by economic recoveries in China and India. Supply-side risks for gasoline will remain in 2021, stemming from continued expansion of refinery capacity in Asia and the possible opening of arbitrage opportunities from Europe.

Bitumen import to India will face a tight market in the Asia-Pacific region in 2021. Naphtha export from India will face a deficit market in the Asian region and is likely to attract a good price.

The Indian oil and gas industry will remain engaged to move towards increased volume and technology of non-fossil fuels like bio-fuels, batteries and hydrogen, requiring investment and technology innovation (see Table). The market is being nurtured and, therefore, is immune to free play of market forces.

 

Thus, India in 2021 is likely to consume 265 million tonnes of oil and gas reflecting a V-shaped recovery on year-to-year basis. Demand contraction experienced in 2020 will be regained in 2021. Since product-wise consumption volume will be maintained at the level of 2019, there will not be any shortfall in downstream operating capacity.

Patra is with Bharat Petroleum Corporation and Asati is in the Indian Economic Service. The views are personal

Published on January 24, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like