Global oil prices have dropped dramatically—from $100 per barrel in July 2014 to $45 per barrel currently. While low oil prices are helping India reduce her import bill, the current lull in global oil and gas activity also provides a golden opportunity to invest in boosting domestic production at the lowest project costs in decades. India has significant domestic assets but these projects are complex and impediments exist to realising this potential. Fixing an artificially-low gas price for domestic gas, especially for complex projects, which is less than half that of imported LNG, is a critical first step.
It is anybody’s guess as to how long will the period of low oil prices last, but it is almost certain that the cycle will turn. India’s first major offshore discovery, Bombay High, saved the country from bankruptcy during the oil crisis of the 1970s when ONGC managed to drive the asset from exploration to production in a short span of five years. Bombay High continues to be a symbol of India’s technical prowess and is still the biggest contributor to domestic production.
The country has a similar challenge and an opportunity. India’s domestic oil and gas production is decreasing and yet the demand is such that, in 20 years, we will require more new oil and gas than what all of Saudi Arabia and Qatar, respectively, produce today.
India’s deepwater assets, especially off the KG basin, are considerable. Current discoveries can double India’s gas production and add more than 100,000 bpd of oil. These projects will kick-start a much larger exploration activity in a geography with considerable potential—two-thirds of India’s sedimentary basins are unexplored. The parallels with the Bombay High discoveries are striking and the time to act is now.
The urgent starting point is for the government to fix deepwater gas exploration premium in a manner that is beneficial for the country and also makes business sense for the explorer. Investments needed in offshore are substantial and so is the risk associated. There is a common meeting ground where the price is justifiable for the country and there is a suitable reward for the risk being undertaken by the explorer.
By 2030, India’s hydrocarbon imports are expected to be in the range of $300-500 billion annually. The number itself is huge but more important is the underlying relevance to the growth and security of the nation. Gas, in particular, will be a precious commodity as it is expensive to transport and is needed for many growth sectors—Make-in-India, clean transportation, small cities, urea production, and clean power. Not many realise that shortage of gas has driven urea imports to nearly 40%, and much of it from China. Imagine an India five years from now, growing at 9%, with manufacturing taking off in a big way but without energy security. Can we, as a nation, take such a risk?
India is not resource-rich. The cost of production from India’s deepwater assets is higher than the cost of production in the Middle East. Domestic production though will still be significantly cheaper than the landed price of LNG.
The long-term contract price of LNG, even at today’s depressed market prices, is close to $11 per mmBtu. Our current price for domestic gas is $4.2 per mmBtu. The difference between the two is at the heart of the debate on gas pricing. Industry players are requesting market price for production from complex projects such as deepwater. This move by the government will drive lower average price of gas, increase exchequer revenue, create local jobs, and provide self-sufficiency in some critical industries. China, as an example of a similar resource-deficient country, provides market pricing for deepwater production. Further, a third of the price given to a domestic producer is returned to the government through royalties, taxes and dividends. Crudely put, our current pricing regime supports “make abroad” above “Make in India”.
Global slowdown in oil and gas offers access to best pricing for know-how, equipment, services and financing. Take the case of deepwater drillships. A single well can cost $100 million to drill and a drillship used for the purpose is typically leased for upwards of $600,000 per day. When ONGC went to the market recently with a tender for drillships, over 20 companies indicated interest and rates are expected to be half of historic rates. Similarly, CERA (industry expert) estimates that subsea production equipment prices are down 20%. The UK and other countries are reaching out to India to finance entire projects at extremely low rates of borrowing. Now is the perfect time to act.
The Prime Minister himself has challenged India to reduce its import dependence 10% by 2022—a very ambitious goal that needs to be backed with major moves on the ground. Deepwater production can help Indian oil and gas industry rise to the call given by the PM. Technology and risk capital can both be brought to the table but the industry needs suitable pricing support from the government to make it all happen.
The author is CEO, Oil & Gas, GE South Asia