India's Dodgy Data Deters Oil MNCs;
But Do We Really Need Them Anyway?

Raman Swamy

For three days last week some of the most powerful men on the planet were in New Delhi. They came, they spoke and they left. 

The vast majority of Indians, and Indian opinion-makers, preoccupied as they were with temporal domestic issues, neither took much notice nor realized the significance.

The CEOs of ExxonMobile, Royal Dutch Shell, Saudi ARAMCO, Rosneft,  British Petroleum, Schlumberger and Halliburton were here. So too was the Secretary-General of OPEC as well as dozens of energy ministers and oil czars from six continents. 

They had all gathered at the Taj Diplomatic Enclave hotel to participate in CERA-Week, a very high level brainstorming event that could have long term impact on the future of India’s growth, development, politics and prosperity.

As everyone knows, or ought to know:
* ExxonMobil is the world's largest publicly traded international oil and gas company. 

* Schlumberger is the world's biggest provider of technology for oil and gas reservoirs, drilling, production, and processing.

* Halliburton is one of the world's largest oil field service companies, with operations in more than 70 countries.

* Dutch Shell is a oil and gas "super-major" and the sixth-largest company in the world in terms of revenue.

* Rosneft is Russia's leading oil and gas extraction and refinement company and among the 50 largest worldwide in terms of sales.

* BP (British Petroleum) is another “super-major”, operating in all areas of the oil and gas industry - exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading as well as renewable energy like bio-fuels and wind power.

* Saudi ARAMCO is a Saudi Arabian petroleum and natural gas company valued at US$ 10 trillion, making it perhaps the most valuable company in the world.

It was indeed a gathering of the most influential energy industry tycoons and strategists.  The Indian media did cover the event.  But the press coverage was typically inward-looking – and the true significance got buried under label headlines:  “Dharmendra Pradhan Addresses Energy Forum”, “More Reforms In Pipeline, Hints Piyush Goyal” and “Modi Meets Oil CEOs”. 

Lost in the insular mindset was the fact that the old clichés still hold good and are more relevant than ever before in today’s global scenario (economic, political or geo-strategic) -  “Oil is Power” and “As flows the oil, so flows prosperity”.   Oil is still worth more than Gold -- those who have oil prosper and those who don’t … collapse!”

For oil-rich countries and energy super-majors, India is potentially a goldmine.  Not just for the retail potential but also as a strategic partner. 

India’s position is multi-dimensional.  On the one hand, more than 70 per cent of its crude requirement is through imports, which means that crude oil is the single biggest item of foreign exchange spending.  But at the same time, exports of petroleum products constitute the country’s single largest item of foreign exchange earnings.

There is another side to the apparent paradox.  Till a decade ago, the petroleum sector in India was almost totally controlled by State-owned oil companies. But today there are numerous private-sector and global players both in the upstream and downstream sectors.  

All this makes the oil and gas and energy scene appear to be full of promise and incredibly attractive.  Ostensibly, this was the reason why the crème de la crèmeof the global energy sector flocked to the Taj Diplomatic Enclave hotel last week.  

Evidently, they were excited about the vision for India’s energy future, the outlook of the oil and gas industries, the scope for accelerating energy reforms in India and reviving the upstream sector.

The main motive was not necessarily to grab a piece of the retail market cake in India. That may be very much on their minds but it is incidental. The real attraction for oil majors is that India is a strategic market.  Retailing can also succeed in India with mutually beneficial arrangements with PSUs.

Even more enticing is the fact that vast areas of India’s sedimentary basins remain unexplored. The exceptional discoveries of oil and gas in recent years have placed India firmly on the global oil and gas map and brought about a paradigm shift in the minds of potential investors in the upstream sector in India.

However, there is a major factor that tends to act as a dampener to all the enthusiasm and excitement.   The key to investment decisions is word can be summed up in one essential pre-requisite - reliable data.  

The global oil czar, energy strategists and superstar CEO were looking for accurate estimates and reasonable trustworthy projection figures of India’s potential. 

This is where the rub lies.  Global multinationals like Shell, BP and ExxonMobile are deeply skeptical about actual gas demand in India.  Corporate CEOs are accountable to their shareholders and the top management cannot afford to risk misadventures in India on the basis of figures that are either fudged or fanciful. 

As oil and gas industry expert Raghavan Sasankan points out, forecasts can go horribly wrong – as they often have in the past.  

In his column in indianoilandgas.com ,  Sasankan writes: A few years ago, an expert group appointed by the previous UPA government, projected the country’s natural gas demand at 473 mmscmd (million metric standard cubic metres per day) in FY 2016-17.

Almost simultaneously, an industry group put out what it called a more “realistic” assessment by projecting gas demand in 2016-17 at 378.08 MMSCMD.

“Here is the reality check: when India’s financial year for 2016-17 ended in March 2017, official data came out with a more sombre estimate of actual gas consumption: 152 MMSCMD, which shows how completely out of whack projections can be. It would be risky to build project plans on dodgy forecasts”.

Moreover, a little over a year ago, the renowned International Energy Agency (IEA) projected India’s oil demand to peak at 10 million barrels of oil per day by 2040, up from the existing level of 3.8 million barrels per day.

The reason cited was the strong economic growth boosted by rising income and population as well as increased urbanization and industrial activities.

The column notes that while it is not easy to make projections about India, the International Energy Agency cannot have been unaware of the risks it was making.

India, after all, is not like Singapore or a European country.  As in the case of China, a reasonably accurate prediction about India’s problems and prospects is perceived to be beyond the capacity of any agency, however, competent it might otherwise be.

Even otherwise, several experts have said that there was no point in building fresh refining capacity in India. The world demand, they assert, is expected to peak in the mid-2020s.  Although the Indian market is expected to keep growing, at least till 2040 and possibly till 2050, the global surplus would easily feed India’s need far more economically than by building new refining capacity that will likely come on stream only in the mid-twenties.

A renowned energy expert is quoted as saying:  “It would be an inappropriate use of our limited financial, land, water, environmental, infrastructural, human and technical resources to expand refining capacity in the current global scenario for crude and petroleum products”.

The long-term view wis that India will continue to remain dependent on crude imports as long as it uses petroleum products. The option of simply importing petroleum products from existing refineries worldwide would be far more economical in an oil surplus world compared with creating new refining capacity in India and importing crude oil to feed these refineries.

In other words, the value addition is minimal and likely to be negative, when one takes into account the huge incentives needed to make these Indian refineries financially viable.

The conclusion is that India could derive far more benefits by deploying financial and other resources in other sectors of the economy.  The argument against surplus refining capacity springs mainly from the fact that the Indian government has essentially subsidized the export of refined products based on imported crude through a host of incentives that ensured the viability of such Greenfield investments. The refining margins cannot even absorb the cost of double handling without the incentives.

In the current global scenario, therefore, creating new refinery capacity to even fully meet domestic demand is highly debatable. Given the global surplus, it would be more rational and economical to simply import refined petroleum products from competing sources in a buyers’ market.

Oct 17, 2017