Oil price boom the best time for India to rethink upstream policy

Each day that India’s growing volumes of increasingly costly crude imports drain its coffers of bigger amounts of foreign exchange, the country is also missing out on a window of opportunity to stem at least some of its losses by turbocharging domestic production.

It is not just the Ukraine war driving crude to 14-year highs that should worry India – global oil supply could remain mired in trouble for the rest of the year. The world’s consumption is rebounding to pre-Covid levels while the OPEC/non-OPEC alliance struggles to revive production, US shale offers only a modest output recovery and geopolitical risks in several key producing countries threaten supply stability. The stage is set for a fundamentally tight market and prices remaining way above India’s pain point.

One of the most prudent and quick paths for India to contain the damage is to pull out all the stops to boost output from the country’s producing fields.

Seasoned domestic producers in the state and private sector know their reservoirs well and several even have projects at the ready to squeeze out more hydrocarbons from their acreage than currently possible. They are being hampered by lack of funds and excessive red tape. Small, timely steps by the government in the form of financial incentives and more streamlined approval processes could help these companies take giant leaps in ratcheting up production.

In an era of growing uncertainty over energy security, achieving higher self-sufficiency in oil and gas should be the touchstone of the “Atmanirbhar Bharat” vision.

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With the fastest growing oil appetite in the world, India imports a staggering 85% of its crude needs and nearly 50% of the natural gas it consumes.

By global standards, the country is a relatively small oil and gas producer and the majority of its crude comes from mature fields. But India has three times the oil and natural gas reserves than currently utilized, according to a 2019 study by the Directorate General of Hydrocarbons. And thanks to phenomenal technological progress in the past decades, enhanced recovery techniques can vastly increase the total oil extracted from older fields.

Of course, bringing new fields on stream could also raise output. But it is a much longer route and one with major hurdles in today’s world of rapid energy transition.

India introduced a slew of reforms in quick succession to reinvigorate its upstream sector starting in the late 1990s.

Unfortunately, the improvements coincided with a gradual shift away from fossil fuels at the turn of the century, which turned into an accelerated pivot towards greener sources of energy by global oil majors and other experienced and deep-pocketed independent producers that India was hoping to attract to its shores.

It is not just the upstream behemoths changing direction. The entire energy industry has been swept up in a wave of climate activism demanding an end to investment in fossil fuels in favour of cleaner alternatives.

India has targeted net-zero emissions by 2070 and has ambitious plans to boost its non-fossil energy capacity. But thankfully, it is far more pragmatic than several other major economies, which have set net-zero goals within the next two or three decades without a roadmap for reaching there.

An emerging economy determined to eliminate energy poverty at home and juggle the imperatives of affordable and accessible energy with climate change mitigation, India is among the few sane voices warning against hastily abandoning investment in fossil fuels.

India has also refused to be bulldozed by Western nations on unrealistic climate targets and will forge its own path of balance and moderation in securing its energy needs.

Now more than ever, quick and decisive action is crucial to not only stem the persistent decline in domestic oil output, but to turn the tide around. Instead of waiting in vain for overseas explorers and risking the long lead time of finding and developing new reserves, help domestic players boost output from currently producing fields.

The steps that need to be taken barely need recapping. Producers and upstream industry organizations have been actively communicating their recommendations to the relevant government departments and other key stakeholders.

If the heavy burden of 67% in combined fiscal levies paid by domestic producers were to be halved, output could be doubled with contractors ploughing the profits back into more development projects in mature fields. Higher production would offset the initial loss in government income from lower levies. Incentives to raise output have worked in India’s heavy industries – so, why not extend them to oil and gas too?

The United Kingdom, Brazil, Canada and Malaysia are managing to drive more investment into their mature basins, including enhanced recovery projects, by slashing taxes, royalties and other charges on contractors.

A host of upstream taxation norms and practices are in need of clarification and simplification, as pointed out in a letter by the Oil and Gas Operators of India to the Ministry of Finance last October. Some rules are ambiguous or simply being misinterpreted, resulting in incorrect levy of taxes, tying up precious company resources in needlessly convoluted calculations and litigation.

Finally, accelerate the regulatory approval processes in the upstream sector. Some steps have been taken in this direction but given the country’s late start on ease of doing business, now isn’t the time to rest on one’s laurels.

The author is an energy analyst based in Singapore

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