There are limits to the influence that can be brought to bear on the actions of oil producers. Enticing MNCs to participate in Indian exploration efforts and working towards alternative payment arrangements, however, is doable
Interacting with global leaders from the energy sector on October 15, 2018, in New Delhi, Prime Minister Narendra Modi flagged three major issues:
First, while expressing concern over the steep increase in international price of crude oil, he urged all leading producers/exporters to be more responsible in fixing the price to bring it down from the current high to a reasonable level.
Second, keeping in mind the overarching need to increase domestic production India, he asked them to consider investing in exploration and development of oil and gas fields and MNCs to transfer of technology, especially to extract oil/gas from geologically and physically challenging ultra-deep water, high pressure/high temperature (HP/HT) areas.
Third, considering the debilitating effect of rupee depreciation on the oil import bill, he urged them to think through for an alternative payment arrangement.
The Prime Minister touched upon all the right notes that are crucial to ensure adequate supply of energy at affordable price to run the wheels of the Indian economy.
First, with the Organisation of Petroleum Exporting Countries (OPEC) countries alone accounting for over 40 per cent of the world oil supply, the market for crude is oligopolistic. Each member of the cartel regulates its supply — as per a well orchestrated agreed plan — in a manner so as to jack up the price to the desired level.
In November 2016, the OPEC decided to reduce output by about 1.2 million barrels a day, effective from January 1, 2017. Initially operative for six months, they stick to the cuts. As a result, crude spiked from $40 per barrel in November 2016 to over $80 per barrel as on October 15, 2018. The cost of producing oil in the OPEC countries being pittance less than $10 per barrel, even at rock bottom $27 per barrel (it reached in January, 2016), they were making huge profit. At $80 per barrel now, they are making exorbitant profit.
Addressing the same forum, OPEC Secretary General, M Barkindo opined that ‘exporting countries had made their best efforts to ensure that global market was adequately supplied’, yet if ‘the price has spurted, this may have a lot to do with sentiments’. Barkindo was referring to the looming trade war and impending US sanctions against Iran. This is skulduggery.
When the underlying fundamental of tight global demand-supply balance is loaded against the consuming countries (a creation of deliberate actions by OPEC members), it makes no sense to blame things on ‘sentiments’. As regards, sanctions against Iran, if only major exporters like Saudi Arabia have the will, nothing can prevent them from pumping more supplies to compensate for the reduced contribution from Iran. The oil rich countries/exporters also need to ponder whether or not by crippling the resource position of importing countries (inevitable if the price is high), they will end up harming their own interest in the medium to long-term.
Meanwhile, US President Donald Trump is building pressure on the OPEC members to bring down the price to a reasonable level and is even contemplating the so-called No Oil Producing and Exporting Cartels Act legislation which can open the group to anti-trust lawsuits. Whether this will prompt the latter to shed their intransigence remains to be seen.
In contrast to the dispensation under the erstwhile United Progressive Alliance (UPA) regime when almost every aspect of exploration and production was under control and micro-managed by bureaucrats, Modi took some bold initiatives to improve the policy environment and reduce regulatory hurdles. In July 2017, the Government introduced the Hydrocarbon Exploration and Licensing Policy (HELP).
Under it, bidders can get a single licence for exploration of conventional as well as unconventional hydrocarbons. They can pick up a block of their choice. They are allowed freedom of pricing and marketing. The unconventional fuels viz coal bed methane and shale oil/gas produced from existing fields as also production from marginal fields also qualify for this freedom.
HELP offers revenue sharing contract. This eliminates scope for Government intervention and reduces interface with the bureaucracy and eliminates delays. The operator can remain focused wholly on optimising production without having to worry as to whether any activity and associated cost will be recognised. It provides a certain and stable policy environment.
Further, to make policy environment for production from deep/ultra-deep water, geologically and physically difficult fields attractive, in March 2016, the Government allowed higher gas price-based on alternate fuels viz fuel oil, naphtha, LNG et al. Modi has thus created a perfect policy setting that should enthuse resource rich countries in Middle East and MNCs to invest in exploration and production in India and bring in technology needed for extracting gas from difficult areas.
As regards, despite continuing strong fundamentals of the Indian economy, the Rupee has lost value primarily because of exogenous developments — increase in US interest rate and withdrawal of monetary stimulus. To ensure that India is not unnecessarily penalised, ways have to be found to avoid making payment in dollar. Modi is taking right steps but the road ahead is tough. There are limits to influence actions of oil producers though enticing MNCs to participate in Indian exploration efforts and alternative payment arrangements is doable.
(The writer is a freelance journalist)
https://www.dailypioneer.com/2018/columnists/responsible-oil-pricing-is-the-key.html