Retrospect Budget 2018: Energy security needs a course correction

The Economic Survey rightly indicates that we as a nation are expected to embark on a high economic growth trajectory. As a continuation, the Union Budget 2018 is a positive step towards an overall development and growth of the economy demonstrating the intent to boost investments in rural development, healthcare, education and social sectors. However, the crucial need of energy security that has a direct correlation with an increase in the economic activities seems to have been neglected in the budget. There is little action that has been taken in addressing the fundamental immediate need of the economy to attain energy security and reduce the burden of crude oil import.

This year oil prices have already indicated a constant surge and are currently trading around US$70 per barrel. This upward trajectory is ominous for countries that import crude oil. India’s behemoth energy requirement has prompted the government to set ambitious goals of self-reliance and energy security. This is in a scenario where the outlook for the inflow of foreign direct investment (FDI) into emerging markets is also cloudy. The combination of rocketing oil prices and potentially low FDI implies that going forward policymakers will have to galvanize energy markets by revitalizing domestic production and easing constraints on capital expenditure for exploration and production.

Energy security is critical to stable economic growth. And while the push to generate renewable energy is commendable and necessary, India’s oil demand dynamics will require the energy sector to fire on all cylinders. Crude oil production will remain a critical component of India’s energy mix and dependence on oil imports, particularly from the middle east, makes it vulnerable to external shocks that could destabilise economic growth in three ways. The first is possible supply disruptions, the second, the import of inflationary pressures and finally a widening current account deficit. Robust domestic production would eliminate some of these risks and contribute to the Make in India push, generating much required jobs and economic growth while enhancing energy security.

Risky import dependence
Rising oil prices are unlikely to dent India’s energy demand. According to the National Energy Policy document, overall energy import dependence could rise to 36%-55% by 2040, from 31% in 2012. This will be a result of a projected population of 1.6 billion, a higher share of manufacturing in GDP and a more urbanized population.

Juxtapose this projected demand with India’s current reliance on crude imports. Domestic production catered to only 17.4% of the total demand of 134.6 million metric tons in the April-November 2017 period-this implies India imports over 83% of its domestic requirement. This is dangerous, as higher reliance on crude oil imports could derail economic growth. At the crux of the issue is the fact that India’s energy resources are dismal-it has 17% of the world’s population and 0.4% of its oil reserves. Ironically, even these reserves remain underutilized.

Dismal reality, lofty goals
India’s energy policy has four pillars-access at affordable prices, improved security and independence, higher sustainability and economic growth. Higher dependence on crude oil imports in an environment where prices are rising is a risk to all these policy objectives. According to official data, domestic crude oil production fell from 35.5 million metric tonnes in 2015-16 to 34.5 million metric tonnes in 2016-17.Largely stagnant crude oil production indicates lacunae in the government ‘s push for self-reliance even as the International Energy Agency projects that oil demand will double by 2040 and estimates that India will require US$8bn annually in upstream oil and gas supply investments.

The government’s lofty goals include reducing the annual oil import bill by US$100bn by 2030. However, there are uphill challenges to attaining this goal as expenditure on exploration and production remains spotty.

Unexplored Wealth?
A large part of India’s energy reserves, roughly 75%, of the known sedimentary basins, remain largely unexplored-of the 26 known sedentary basins, only seven are currently producing oil and gas. The scale of investment required to achieve India’s energy goals and guarantee energy security within the set time frame will mean both domestic and foreign investment will have to flow into the sector.

FDI in the energy sector in India has been historically dismal, averaging 2% of all inflows in the last two decades. Initial estimates of FDI growth in 2016-17 is at 8%, year-on-year, significantly lower than the 24% average in the previous two years. Inflow of foreign investment will remain volatile in 2018 as emerging markets like India feel the effects of the US tightening monetary policy. Further, the exit of some foreign players because of regulatory and bureaucratic hurdles and, the patchy implementation of a few policies by the government, has somewhat marred investor confidence. Under this scenario, where foreign investment is likely to be weak, it is imperative that domestic oil firms accelerate exploration and production activities.

A level fiscal playfield
In the last three years, there has been a tremendous shift in the energy landscape led by the emergence of shale oil and gas, the surge in the production of renewable energy and the corresponding decline in the price of alternative energy. India’s domestic crude production was at a five-year low of 68 million tonne in 2016/17, down from 86 million tonnes in 2012. There have been some positive moves that may revive production like the extension of production sharing contracts for the pre- New Energy Licensing Policy oil and gas blocks for an additional 10-years which was announced in early 2017. Moreover, creating a level playing field for domestic production vis-a-vis imported crude, and addressing other issues of fair pricing of domestic produce and additional royalty burden will spur confidence and help both investment inflow and the nation’s energy independence.

Further, the oil and gas sector is largely out of the purview of the Goods and Services Tax (GST) introduced in 2017. Crude oil, petrol, diesel, natural gas and aviation turbine fuel are not covered by the GST, resulting in higher costs for the oil companies and stranded input tax credit. It follows that some fiscal incentives and a more adaptive fiscal regime would be essential to spurring investment by domestic companies in oil and gas exploration. Lastly, fiscal restraints weigh down domestic producers who are saddled with higher duties in the form of an ad valorem cess of 20% of the cost per barrel (implemented in February 2016). Prior to this, the Oil Industry Development cess, which was first introduced in 1974, was much higher-for instance, when oil prices rose over $100/barrel in 2012, this cess was at Rs4,500 per tonne. The cess acts as a disincentive for oil companies as it raises costs and acts as a deterrent to exploration activity by inhibiting capital expenditure. Additionally, it is a competitive disadvantage as imported oil is not subject to these taxes.

The writer is CEO, Vedanta Cairn Oil & Gas, views expressed are his own.

Source: economictimes.indiatimes