note The International Dimensions of India s Energy Security PROGRAMME SECI

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1 The International Dimensions of India s Energy Security note PROGRAMME SECI February 2014 Note in the framework of the SECI project (Energy Security from China and India) in partnership with the CSFRS (Conseil Supérieur de la Formation et de la Recherche Stratégiques) Isabelle Saint-Mézard, Asia Centre Executive summary Except for coal, India is not well endowed with fossil fuel resources. A combination of aging infrastructures, half-hearted efforts in exploration and production (E&P), regulatory inconsistencies and dysfunctional pricing regimes have further added to its energy woes. Not surprisingly, India has increasingly relied on imports to meet its energy requirements. Fuels imports, which have always been an important item in India s import basket, have recently come to account for more than one third of India s overall imports. India s growing dependence of fuels imports especially on Petroleum, Oil and Lubricants (POL) imports means that major fluctuations in international oil prices can have a substantially negative impact on its trade balance and its macroeconomic indicators, as reflected by the recent pick in its current account deficit (at 4,2 % of GDP in ). strategy of many public sector units (PSU) has proved problematic, with improper evaluations of the assets involved both at the technical and financial levels and risky acquisitions in unstable countries, such as Sudan/ South Sudan and Syria. Finally, it would seem that the foreign acquisition trend has not much to do with India s energy security, especially as very little of the oil or gas produced overseas is brought home. Indeed, Indian energy majors prefer to sell their fuels abroad because the controlled price policy in India implies that they have to sell oil and gas at discounted rates, i.e. at prices that are disconnected from the global trends. In this context, energy security is just an excuse for them to justify their strategy of commercial reinvestment overseas, rather than at home. 71 boulevard Raspail Paris - France Tel : Fax : ww.centreasia.eu contact@centreasia.eu siret As part of their energy security efforts, Indian authorities have encouraged public and private sector companies to compete for overseas asset acquisitions since the 1990s. However, India s quest for foreign assets has so far failed to contribute to its energy security. First, overseas assets still account for a minor percentage of India s energy imports. Moreover, the acquisition

2 Introduction Except for coal, India is not well endowed with fossil fuel resources. A combination of aging infrastructures, half-hearted efforts in exploration and production (E&P), regulatory inconsistencies and dysfunctional pricing regimes have further added to its energy woes. Not surprisingly, India has increasingly relied on imports to meet its energy requirements, which in turn has meant that a growing number of external factors could impact its energy security. Acknowledging that energy interests had to be factored in the conduct of India s foreign policy, the Ministry of External Affairs set up an Energy security division in It is not clear however, whether India has developed a consistent energy diplomacy or not, as reflected by the debates surrounding its foreign assets acquisitions. 1. India s growing import dependence: problems and vulnerabilities Fuels imports have a direct impact on the evolution of India s overall imports. They accounted for nearly 31% of India s total imports in and for 37% in , with the sub-group of Petroleum, Oil and Lubricants (POL) claiming a major share in the fuel category. Table 1: Major commodity composition of India s imports (percentage share) Commodity group Foods and allied products Fuels, of which -POL Fertilizers Capital goods Others, of which Gold & silver Source: Ministry of Finance, Economic Survey , Government of India, New Delhi, The share of POL imports in India s total imports increased from 28.7 % in to 31.7 % in Incidentally, the rise in international oil prices took a heavy toll on India s trade deficit, which reached a new high at USD billion in As mentioned by the Finance Ministry in its Economic Survey , this was the highest-ever trade deficit in India since , contributing to a high current account deficit (CAD) of 4.2 per cent of GDP 1. In other words, India s growing dependence of POL imports means that major fluctuations in international oil prices can have a substantially negative impact on its trade balance and its macroeconomic indicators. 1 Ministry of Finance, Government of India, Economic Survey : 2

3 A high import dependence on crude oil India has become highly dependent on crude oil imports. From 74 million tonnes (MT) in , its crude oil imports rose to MTs in and MTs in The share of imports in India s total oil consumption, which hovered around 43% in , reached 79% in According to a recent report by the International Energy Agency (IEA), India could emerge as the second-largest importer of oil next to China by This high level of import dependence confronts India with the threat of supply disruptions. This is especially so as Indian imports rely heavily on the Middle East, a region perennially in a state of geopolitical flux (in , about 70% of India s crude oil imports came from the Middle East) 4. The challenges affecting India s close energy cooperation with Iran stand as a case in point. Iran was India s second largest supplier after Saudi Arabia between , meeting on average about 14% of India s crude oil imports. But the regime of sanctions on the Iranian regime has forced Indian refiners - Hindustan Petroleum Corporation Ltd (HPCL), Mangalore Refinery and Petrochemicals Ltd (MRPL) and Essar - to scale down imports from this country, while other majors - Bharat Petroleum Corporation and Reliance (RIL) - have altogether stopped sourcing oil from Iran. Hurdles in the mechanics of payments have further complicated trade relations between India and Iran since Not surprisingly, Iran has lost its rank as India s second largest crude oil supplier since Indian oil companies have increasingly relied on Saudi Arabia and Iraq this country has become their second largest crude supplier since as well as other Gulf countries (Kuwait, Qatar and UAE). Incidentally, the easing of US and European sanctions on Iran in November 2013 has not yet stopped the downward trend in India s crude oil imports from this country 6. In the context of India s energy security, Indian authorities have strongly encouraged public-sector units (PSU) to diversify the origins of their crude oil imports. While the Middle East has remained a resource region of prime importance, Indian oil companies have also looked toward alternative suppliers in Africa and South America. Two countries - Nigeria and Venezuela - as well as Angola to a lesser extent, have stood as good alternative options. 2 Central Statistics Office, Energy Statistics 2013: gouv.in 3 «Gas imports remain flat despite drop in domestic production», The Hindu business line, April 25, The Middle East includes Iran, Iraq, Kuwait, Oman, Qatar, S. Arabia, UAE, Yemen and Syria 5 Under a special arrangement, India paid for Iranian crude in rupees because payment in dollars was not allowed by the US and EU sanctions regime againt Iran. The rupees earned by Iran were used to buy physical goods from India. 6 «Govt may cut Iranian oil imports by 15 pc y/y in 2014/15: Oil Ministry», The Economic Times, Jan. 14,

4 Table 2: Share of major resource countries in Indian crude oil imports (in percentage) Source/Year Saudi Arabia Iraq Iran Kuwait UAE Nigeria Venezuela Angola Qatar Brazil Rest (Oman, Egypt, Malaysia, Mexico ) A closer look at the diversification strategies of Indian refiners shows some nuances between private and public sector companies. Basically, PSUs have a limited choice on the international market because their domestic refineries need low sulphur crude, also called sweet crude, which is usually more expensive than heavy crude. As one of the largest producers of low sulphur crude in the world, Nigeria has been an interesting source of imports for PSUs such as Indian Oil Corporation Limited (IOC), Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Mangalore Refinery and Petrochemicals Limited (MRPL). In contrast to public sector companies, private stakeholders such as Reliance and Essar enjoy a greater room of manoeuvre on the international market. Indeed, their state-of-the-art refineries make it possible for them to buy heavier and cheaper crude. Their strategy is to import cheap heavy grade in large volume from countries such as Venezuela, to convert it into high-quality fuels and re-export it toward Asian, European and North American market, thus making huge benefits in the process. For instance, Venezuela s growing position in India s total oil imports is entirely due to Reliance s sourcing strategy. This country has indeed become a top supplier of crude oil for RIL. In 2012, the Indian major concluded a 15-year deal to buy up to barrels a day of heavy oil from Venezuela. Finally, it should be mentioned that India has decided to increase its strategic storage facilities in order to protect its economy against potential supply disruptions. At present, India has crude reserves for 74 days of consumption, a capacity the government has deemed insufficient. The Indian Strategic Petroleum Reserves Ltd, a subsidiary of the Oil Industry Development Board, has been mandated to build three strategic storage facilities at Visakhapatnam, Mangalore and Padur with a combined capacity of 5 MTs. An additional series of four storage facilities with a combined capacity of 12.5 MTs is currently under study for a total cost of USD 2.2 billion. A growing import dependence on natural gas Despite India s large stated reserves, domestic production has been lagging. As a result, India has had to rely on import of Liquefied natural gas (LNG) since Imports rose to 35 million metric standard cubic feet per day (MMSCMD) in and 50 MMSCMD in India s import dependence on natural gas is currently around 30%. According the International Energy Agency (IEA), the Indian market of natural gas may become one of the fastest growing in the world in the next 20 years. Despite the existence of various energy-surplus countries in its extended neighbourhood such as Bangladesh, Burma or Iran, India does not yet have a single transnational pipeline to bring gas from the region. Prospects do not look very bright over the short to middle term. After many misgivings, India has decided to stay away from the Iran-Pakistan pipeline project. It has also lost to China an important pipeline project to bring gas from Burma (through Bangladesh). One a more positive note, India has reportedly decided to join the USD 7.6 billion TAPI project for transporting gas from Turkmenistan, through Afghanistan and Pakistan. However, the security troubles affecting Afghanistan and Pakistan may act as serious obstacle to the actual development of this project. Without a doubt, a transnational pipeline connection would greatly help in enhancing energy security because it would bring India major benefits such as lower transport costs, lower transit losses and fewer risks of supply disruption. It would also offer an alternative to LNG, which as of now, is India s single option. As far as LNG is concerned, India has seized a few long-term contracts with Qatar and Australia. Petronet LNG India s biggest gas importer - entered into a 25- year agreement with Qatar in 2001 for the supply of 7.5 million metric tonnes per annum (MMTPA) of gas. It also concluded a 20-year deal with Australia in 2009 to buy 1.44 MMTPA from 2015 on (but the Indian government has requested a review of the agreed price, which is rather high at around 17 USD). Indian LNG importers - GAIL, Petronet LNG, Gujarat State Petroleum and Indian Oil have conducted price negotiations with Russian Gazprom for a total of as much as 10 MMTPA since India s long-term contracts do not meet the total of its import requirements. As a result, this country has to make do with spot market supplies, which make LNG more 4

5 expensive 7. In this context, the shale gas revolution in North America has been seen as a boon. From 2011 on, Indian public sector companies such as GAIL and Petronet have rushed to secure long-term supply of cheap gas from the Atlantic Basin. GAIL signed two long-term contracts with US producers (one with Cheniere Energy to secure 3.5 MMTPA of LNG, the other with Dominian for another 2.3 MMTPA) starting from 2017 on. This was followed by Petronet s 20-year contract with United LNG to buy 4 MMTPA from the Gulf of Mexico. Private stakeholder, Reliance, has also entered the unconventional gas market in the US. In a single year, in 2013, it concluded three joint ventures with US partners to expand its E&P base in this sector. Interestingly, there have been some signals suggesting that GAIL and Petronet s investments in LNG supplies may not contribute to India s energy security. Indeed, GAIL may not be in a position to bring its 6 MMTPA of LNG back home, for want of Indian buyers. The main factor accounting for this situation is that Indian power and fertiliser firms do not want to commit to buying imported gas; their priority is rather to lobby hard to have a larger share of the homeproduced gas, which is far cheaper than imported gas 8. As result, GAIL may as well decide to sell its LNG from the Atlantic basin on the international market. Finally, it should be mentioned that India s capacity to import LNG is constrained by its limited regasification facilities, with only four operational LNG terminals on its littoral and a cumulated capacity of MMTPA 9 (see map in annex). While the government is planning to reach a regasification capacity of 26 MMTPA by 2016, India s domestic pipeline infrastructure for transporting oil & gas will also require substantial investments. A fast-growing import dependence on coal Coal has been the bedrock of India s energy security, and it is expected to remain so in the years to come. While India enjoys huge reserves of this particular fuel, the quality of the coal it produces is not very high. To meet the demand of high quality coal especially from the steel industry India has had to rely on imports, primarily from Australia, South Africa and Indonesia. From MTs in , imports of coal increased to MTs in and nearly 138 MTs in The share of coal imports in India s total consumption increased from 2.2% in to 11.1% in and about 20% over the past year 10. Currently, India is the second-largest importer of coal after China. According to the IEA, it may surpass China to become the largest importer of this commodity by Spot LNG prices range between $18-19/mmBtu, and the long-term contract gas at around $11/mmBtu, while domestically produced gas is priced between $4.2-$5.7/mmBtu. 8 Rajeev Jayaswal, «Gail India struggles to find buyers for imported LNG», The Economic Times, 13 mai Two of these terminals are located in Gujarat (Petronet LNG- Dahej Terminal and Shell Hazira LNG Terminal, with a 10 MMTPA capacity and a 2.5 MMTPA capacity respectively). The third one is located in Maharashtra (Dabhol LNG Terminal with a 5 MMTPA capacity). The fourth terminal is a newly commissioned facility in Kerala (Petronet LNG-Kochi Terminal with a 2.5 MMTPA capacity). 10 Ministry of Finance, Government of India, Economic Survey : India s quest for foreign coal partly results from the government s plan to increase the national power generating capacity through Public-Private Partnerships (PPP). In response to the PPP initiative, major private sector companies such as Reliance and Tata have developed ultra mega power projects (UMPPs), i.e. coalbased power plant with a minimum capacity of 4000 MW. In view of the limitations of the domestic production, these private stakeholders have acquired coalmines overseas mostly in Indonesia and Australia to supply their power plants back home. However, both Canberra and Jakarta have since changed their domestic regulation and imposed a rise on the rate of their exported coal, thus putting Tata and Reliance in a difficult position back home. Both majors have intensely lobbied the Indian government so that they could rise their domestic power tariffs. In response, the government has set up the Deepak Parekh committee, which is indeed expected to allow an increase in price. However, according to some observers, the entire process has been biased from the start, because of a dysfunctional bidding system on the UMPPs. According to them, private stakeholders such as Reliance and Tata would have opted for a wellestablished strategy to bid low actually promising power tariffs unrealistically low to get the UMPP contract, without factoring in major risks such as tariff changes in the international market. Once a major change in fuel prices in enacted overseas, they follow a de facto policy and lobby the government to be allowed to relax tariff rules and to pass on the rise in fuel costs to the Indian consumers. 2. India s strategy of foreign assets acquisitions Since the 1990s, the Indian government has encouraged public and private sector companies to compete for overseas asset acquisitions, with a view to enhance India s energy security. India s track record in overseas asset acquisitions ONGC Videsh Ltd (OVL), the overseas arm of state-run Oil and Natural Gas Corp. Ltd (ONGC) is India s flagship company for major energy asset acquisitions abroad. OVL s first overseas asset was bought in Vietnam, in In the following years, its most notable asset acquisitions were made in 2001, with the acquisition of a 20% interest in the offshore Sakhalin-1 project in Russia, and in 2003, with the acquisition of a 25% interest in the Greater Nile project in Sudan (as well as South Sudan with the creation of this new state in 2011). With a total investment estimated at USD 5 billion, OVL is currently involved in 32 oil and gas assets in 16 countries (with investments in nine producing assets, four development projects and nineteen exploration projects) OVL official website: aspx. Vietnam (2 projects), Russia (2 projects), Sudan (2 projects), South Sudan (2 projects), Iran (1 project), Iraq (1 project), Libya (1 project), Myanmar (2 projects), Syria (2 projects), Cuba (1 project), 5

6 The company produced about MMT of oil and equivalent gas during the year and 7.26 in Its objective is to reach a production of 20 MMTOE by and 60 MMTOE by In this connection, OVL has engaged into aggressive competition since , as reflected by the following list of assets acquisitions: acquisition of stakes in two exploration blocks in Columbia in early 2013 acquisition of stakes in upstream and midstream assets in Azerbaijan in March acquisition of 20% stake in the gas rich Rovuma basin in Mozambique for USD 5.11 billion, in July 2013 acquisition of two shallow water oil and gas blocks in Bangladesh, in partnership with OIL in October OVL has also expressed its interest in raising its stake in oil and gas acreages in Brazil and Venezuela. OVL s experience has prompted other national oil companies such as Bharat Petroleum Corporation Ltd (BPCL), Indian Oil Corp (IOC) and Oil India (OIL), as well as Hindustan Petroleum Corporation Limited (HPCL) and GAIL to pursue overseas assets as well. For instance, BPCL has incorporated its exploration and production firm Bharat PetroResources - in As of November 2013, this company had participating interests in 9 exploration blocks in Brazil, and 1 each in Mozambique, Indonesia, Australia and East Timor. Private oil companies such as Reliance and Essar have also bought assets overseas. With their excess refining capacity at home, these companies have been eager to bring cheap heavy oil to their refineries and to resell it with a substantial margin on the international market. RIL has 13 blocks in its international portfolio (2 in Peru, 3 in Yemen, 2 each in Oman, Kurdistan and Colombia, 1 each in East Timor and Australia; which amounts to a total acreage of over 99,145 sq. km). Essar s oil and gas assets abroad include two blocks in Madagascar since 2006, one block in Nigeria (2010) and one block in Vietnam (2007). A modest track record as compared with China Indian companies have confronted several difficulties to acquire overseas assets. Not only have they been pushed out of many overseas deals because of inner limitations and constraints, they have also been outbid by Chinese competitors for securing assets in countries like Kazakhstan, Nigeria, Angola, and Russia. The recent loss of the Kashagan oil field in the Caspian Sea to Chinese interests proved especially chocking to many Indian experts and commentators. OVL had concluded a deal with Kazakhstan to buy a 8.4 % stake in the Kashagan oil field for USD 5 billion. However, by mid-2013, Kazakh authorities blocked the deal and transferred the stakes to China National Petroleum Corporation (CNPC). More often than not, Indian companies have found themselves financially constrained and with limited bargaining power when competing against Chinese Brazil (2 projects), Nigeria (1 project), Colombia (8 projects), Venezuela (2 projects), Kazakhstan (1 project) and Azerbaijan (2 projects). 12 Ibid. counterparts. The fact that Indian oil and gas majors do not have a concerted strategy, deprives them of substantial negotiating power. Some in India have recommended forming a consortium of companies. For instance, PMS Prasad, the Executive Director of Reliance Industries (RIL) has recommended that public and private sector firms should bid together for oil and gas fields abroad. But no concrete steps in this direction have been taken yet. Furthermore, there has not been much synergy between Indian oil majors and the Indian state apparatus. This also comes in contrast with China, which has extended substantial aid packages, along with low-interest loans and direct financing of infrastructure projects, as part of its energy acquisition strategy. India has not yet been able to have such a concerted approach. Quite often, the diplomatic channels have stayed away from the negotiations between Indian majors and the company floating the offer and/or the host government. The Indian energy community is indeed said to be quite reluctant to have the diplomatic channels involved in its overseas dealings. In this respect, the notion of energy diplomacy seems a distant dream. Foreign asset acquisitions and India s energy security Most observers consider that India s quest for foreign asset acquisitions has so far failed to contribute to India s energy security. First, overseas assets still account for a minor percentage of India s energy imports. Moreover, in its acquisition strategy, OVL has often failed to properly evaluate the assets involved both at the technical and financial levels. In 2011, the Comptroller and Auditor General (CAG) of India released an audit strongly criticizing OVL s acquisitions between 2004 and The audit report pointed that out of 36 assets acquired at the exploration stage, only five had been successful wherein OVL was not the operator. Of particular concern was OVL s acquisition of Imperial Energy Corporation Plc., an upstream oil exploration and production company based in the Tomsk region of Western Siberia, at a total cost of USD 2.1 billion, in As noted by the CAG report, this move resulted from a serious miscalculation as the production from the Tomsk region proved to be far below OVL s expectations, thus generating heavy losses for the company. Another problem is that PSUs such as OVL have acquired a number of assets at a bargain in unstable countries. Thus, adverse geo-political conditions in Sudan and South Sudan as well as Syria have challenged OVL s production in the past few years. From 6.2 MMT during the year , OVL s oil production declined to an estimated 4.3 MMT in Of particular concern is the situation in South Sudan, where India has important assets. OVL has had to temporarily shut down its oilfields at Greater Nile Oil Project and at Block 5 and evacuate its expatriate since December Finally, some observers posit that the foreign acquisition trend has not much to do with India s energy security. Interestingly, they point to the fact that OVL sells its Sakhalin oil to Russia and its Burmese gas (in the Shwe gas fields) to China. In point of fact, very little of the oil or gas produced 13 OVL, Annual Report : default.aspx. 6

7 overseas is brought home. Indian energy majors prefer to sell their fuels abroad because the controlled price policy in India implies that they have to sell oil and gas at discounted rates, i.e. at prices that are disconnected from the global trends. In this context, energy security is just an excuse for OVL and other PSUs to justify their strategy of commercial reinvestment overseas. Indeed, the main concern of Indian PSUs is to reinvest their financial surpluses abroad, rather than at home. For these companies, the market risk in India is deemed too high. In other words, they know full well they cannot expect any financial return from their investments in a market, which is beset with unpredictable regulations, loose policy formats as well as uncompetitive market-based pricing policies. Conclusion Fuel imports stand as a critical dimension in India s energy security. In view of India s current difficulties to revamp its energy sector, to make it more transparent, predictable and market-friendly, it is highly probable that foreign investors will stay away, while Indian majors will find ways to reinvest their capital surplus overseas, rather than home. It is however striking to hear Indian leaders asserting that the country could become self-sufficient by For instance, Union Minister for Petroleum and Natural Gas, V. Moily, asserted in July 2013 that oil imports would come down to nil by By contrast, in early December 2013, IEA head Maria van der Hoeven presented far dimer prospects, saying: When we look at India, we see that in 2035, India will be the largest importer of coal, will be second (largest) importer of oil next to China and will be number four in importing gas after European Union, China and Japan «India will be self-sufficient in energy sector by 2030», The Hindu, July 14, «India will be largest source of oil demand growth after 2020: International Energy Agency», The Economic Times, Dec. 4,

8 CENTRAL STATISTICS OFFICE MINISTRY OF STATISTICS AND PROGRAMME IMPLEMENTATION Energy statistics