Crude check

Oil prices have let off a bit of steam over the past week. But there is no room for complacency. Oil is notoriously fickle and trying to forecast its movement is a mug’s game, with multiple global factors and uncertainties at play. Few anticipated the fuel’s crash from triple digits in 2014 to less than $30 a barrel in 2016. Fewer anticipated the more-than-doubling since then to more than $80 a barrel now. While nothing can be ruled out, oil at $100 a barrel, predicted by some analysts, seems unlikely even after the US sanctions on Iran (which will kick in from November 4) come into force. Other OPEC nations, primarily Saudi Arabia, are expected to step up oil output to compensate for the shortfall arising from the sanctions. Also, the possibility of China continuing to import oil from Iran in the wake of its trade war with the US could mean lower-than-expected supply disruptions. The EU nations are reportedly planning a ‘special purpose vehicle’ to workaround the US sanctions.

That said, the country needs to prepare on a war footing to shield itself from future oil supply disruptions and price shocks. In contrast to the Prime Minister’s goal of reducing oil imports by 10 per cent by 2022, the dependency has only increased over the years to 83 per cent now. This needs to be reversed. For this, domestic oil production, that has been largely stagnant, needs a booster shot. The HELP (Hydrocarbon Exploration Licensing Policy) regime of 2016 sought to address pain points in domestic exploration and production, with progressive provisions such as unified licensing policy (that lets exploration of all hydrocarbons in a block) and open acreage licensing (that allows on-tap bidding). The first round of block allocations under the open acreage auctions was a step in the right direction.

More auctions are slated. Rightly so, given that a vast portion of India’s sedimentary basins are unexplored. But it is also important to encourage participation from more domestic explorers and also foreign players, who were missing in action in the first round. Also, what will really matter is for the exploration to translate into significant production within a reasonable period. For this, the Centre must ensure a stable regulatory, and financially viable, regime for producers. It should build more strategic petroleum reserves and ensure timely completion of these projects. The PSU oil companies should have adequate flexibility in oil sourcing contracts. They should also be encouraged to use derivative instruments to hedge against rising prices. The Centre must actively encourage substitution of oil-based products with electricity and renewables. This will, however, take time to achieve critical mass due to technological and financial challenges.

COMMENT NOW