Hydrocarbon 2025

Hydrocarbon Vision 2025 •

A ministerial group set up by the Prime Minister to give focus on long-term energy security for India has developed the following vision for the next 25 years.

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To assure energy security by achieving self-reliance through increased indigenous production and investment in equity oil abroad.

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To enhance quality of life by progressively improving product standards to ensure a cleaner and greener India .

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To develop hydrocarbon sector as a globally competitive industry which could be benchmarked against the best in the world through technology up gradation and capacity building in all facets of the industry.

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To have a free market and promote healthy competition among players and customer service.

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To ensure oil security for the country keeping in view strategic and defense considerations.

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Focus on oil security through intensification of exploration efforts and achievement of 100% coverage of unexplored basins in a time bound manner to enhance domestic availability of oil and gas.

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Secure acreages in identified countries having high attractiveness for ensuring sustainable long-term supplies.

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Pursue projects to meet the deficit in demand and supply of natural gas, and facilitate availability of LNG.

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Maintain adequate levels of self sufficiency in refining (90% of consumption of middle distillates).

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Establish adequate strategic storage of crude and petroleum products in different locations. Create additional infrastructure for distribution and marketing of oil and gas.

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Open up hydrocarbon market so that there is free and fair competition between public sector enterprises, private companies and other international players.

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Create a policy framework for cleaner and greener fuels.

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Have a rational tariff and pricing policy, which would ensure the consumer getting the petroleum products at the most reasonable prices and requisite quality, eliminating adulteration.

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Announce a long-term fiscal policy to attract required investments in hydrocarbon sector.

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Restructure the oil sector PSUs with the objective of enhancing shareholder value and disinvest in a phased manner in all oil sector PSUs.

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To develop regulatory and legislative framework for providing oil/gas security for the country.

HYDROCARBONS VISION 2025 By P.N.V. Nair Hydrocarbons-crude oil and natural gas-play a pivotal role in powering industrial growth and development activity. The importance of oil and gas can be gauged from the fact that it accounts for 45 per cent of India's total energy requirements, and will continue to do so until 2025. While the share of oil (which presently constitutes 35 per cent) is expected to reduce to 25 per cent by 2025, the share of gas will rise to 20 per cent (from the present level of 7 per cent) as natural gas will be a preferred fuel for many applications where pipelines exist. Even though a developing country like India has a high energy-intensity, the per capita consumption is around 5 times lower than the world average. However, consumption is expected to increase at a faster pace in the coming years. Moreover, as the demand-supply gap widens, the import dependence of oil has risen to 65 per cent (as against 30 per cent in 1985-86) due to lower domestic production. Also, considering the worst-case outlook (India's GDP growing at 5 per cent until 2025), the demand for petroleum products is expected to rise to 280 million tonnes as against 90 million tonnes last year. In such a scenario, it becomes imperative to have a long-term policy for the hydrocarbons sector, which would facilitate meeting the future needs of the country. The Hydrocarbons Vision 2025 lays down the framework which would guide the policies relating to the hydrocarbons sector for the next 25 years. Issues such as E&P, refining, marketing, external policy, oil security, tariff and pricing, and restructuring and disinvestment are addressed by the Group, to ensure that an optimal mix of energy resources are made available to the consumer at the right price. Exploration and Production With regard to the energy sector in general and the hydrocarbon sector in particular, the E&P vision will be to undertake a total appraisal of the Indian sedimentary basins for hydrocarbon potential and to optimize production of crude oil and natural gas in the most efficient manner. This can be achieved through intensive exploration efforts endorsed by effective mobilisation and infusion of technology and capital. Leveraging upon India's IT strength and highly skilled manpower, the E&P industry will have to develop a strong technology base to become globally competitive. Due to the uncertainties of the exploration game and the dynamics of international oil prices, the mobilisation of huge amounts of capital will be difficult. In such a scenario, the Group recommends that the government will have to step in and their support will be crucial, especially in the short- to mediumterm, whereas in the long-term, the Group feels that market mechanism will take care of the funding as the industry may get market-oriented in the coming years. Under the New Exploration Licensing Policy (NELP), the sub-continent has been divided into geographically distinct exploration blocks. The allotment of these blocks is done by bids in the nature of lease/mining licence for a specified period. The government still retains ownership control over these areas and enters into a production-sharing contract with the successful bidder. Refining As a pivotal source of energy, stable oil supply and national oil security are important determinants for the development of the economy. In such a scenario, the Group recommends that the country should have refining capacity that is sufficient to meet 90 per cent of the demand for middle distillates, which constitutes a major chunk of the domestic demand. Given the free market scenario in the future, investment decisions should be left to the sponsors and investors. By investing in production assets

overseas, the Group feels that Indian refining companies will have a captive supply of crude, which will give them a distinct competitive advantage on a global scale. As the domestic refining industry gets increasingly developed, it becomes imperative to attract private players, both domestic and foreign, and this should be coupled with operational autonomy for the PSU refineries, since their ability to make decisions should be free from external scrutiny. Finally, according to the Group, lowering of trade and tariff barriers (in view of WTO) would reduce the competitive advantage for the domestic industry. In such a scenario, lowering the cost of capital by ensuring infrastructure status to the refining industry will help neutralise the situation. Marketing With the marketing deregulation expected next year, operational restrictions will have to be removed to facilitate a smooth transition into a free market scenario. The government has to go on a restructuring mode to improve the competitive advantage of the existing marketing companies, such as HPCL, BPCL, IOC and IBP. Already, these companies have acquired the government stake in the stand-alone refineries like Kochi Refineries, Chennai Petroleum, Numaligarh Refineries and Bongaigaon Refineries. These acquisitions will help them to significantly improve their refining-to-marketing ratios and make them increasingly competitive. Since it will not be possible for domestic refiners like RPL to build a distribution network overnight, they should be given suitable duty protection and, for the medium term, should continue to utilise the distribution network of the PSUs, until they have one of their own in place. Since marketing is more remunerative than refining, the Group recommends that only those companies that are willing to invest Rs 2000 crore either in E&P or refining or a combination thereof should have access to marketing. The other important aspects to be addressed are the prevailing price distortions there should be a complete withdrawal of subsidy on LPG while subsidy on the more politically sensitive kerosene should be removed in a phased manner. There should also be a rationalisation of sales tax across states to enable the right price to the consumer. The country is left with a huge oil pool deficit mainly because of the large imports and the administered price mechanism of the products. Therefore, it should be the long-term goal of the government to increase oil production and reduce imports. The revival of the oil industry will, in turn, enable the recovery of the economy as a whole. The Hydrocarbons Vision 2025, no doubt, spells out the government's strategy and operational style with regard to this vital industry.