Defence and petroleum ministry?s tussle over exploration licences show public institutions in India are still bound by rules set decades ago
The oil industry, the law of unintended consequences, the interplay between competing interest groups and the role of technology and scenario planning are the subjects of this article.
Shale gas and tight oil has revolutionised the US energy sector. The combination of hydraulic fracturing and horizontal drilling has unlocked huge reserves of hydrocarbons, so much so that the US is now on the verge of becoming an exporter of gas. Environmentalists have been concerned about the impact of this revolution on the quality of aquifers, and some groups have suggested that excessive drilling might exacerbate the incidence of earthquakes. But there has been no conclusive evidence to support these concerns.
No one, however, had anticipated that the real risk to the environment might come from an increase in gas flaring. That, now, is a rising worry. It has been reported that in the state of North Dakota, gas flaring has increased by 50%, and that the regulator in Texas issued 1,963 permits to flare gas in 2012, up from 306 in 2010. The World Bank has estimated that the volume of gas flared in the US has tripled in the last five years, and that the US is now the 5th highest ?flarer? of gas in the world next to Russia, Nigeria, Iran and Iraq. All this has happened because of the low price of gas. A few years ago, the price of gas in the US ranged between $6-8/million British thermal unit (mmBtu). This made it profitable for companies to shift their exploration efforts to unlocking shale molecules. Their success has now pushed prices to below $4/mmBtu and profitability has been eroded. More importantly, however, companies are no longer investing in gas pipelines and tankage. As a result, there is an inadequacy of distribution facilities, and surplus gas is being flared.
Last week, the papers reported that the ministry of defence and the ministry of petroleum were locked in a dispute over the allocation of exploration licences. The defence argument was that exploration? in the Krishna-Godavari and Mahanadi basins should be stopped, because the oil companies are operating close to a naval base and lay on the flight path of their rocket missile tests. Petroleum has reportedly countered by stating that these licences were issued years ago; that the oil companies have already spent close to $13 billion; that there have been significant discoveries?in fact, the D6 field, one of the defence ministry?s “no-go” blocks has been in production for the past few years?and that the revocation of licences would call into question the government?s commitment to contract sanctity. The prime minister has directed the two ministries to settle their dispute within a month.
Vilfredo Pareto, the welfare economist, wrote that ?if a certain measure A is the case of the loss of one franc to each of a thousand persons and of a thousand franc gain to one individual, the latter will expend a great deal of energy whereas the former will resist weakly, and it is likely that in the end, the person who is attempting to secure the thousand francs via A will be successful?. We see such results all the time. The dysfunctionality of US politics is, for instance, to a large extent due to the financial clout of narrow interest groups. But in the case of the oil industry, the Paretian observation loses its edge. This is because the clash is usually between comparably powerful interest groups. The oil industry is flush with funds; the environmentalists are also well financed and have broad public support and in the specific case of the struggle between defence and petroleum, both have a compelling case. The likelihood of one group succeeding over another is not, therefore, as high as suggested by Pareto. The greater likelihood is of a standoff.
What is befuddling about the clash between defence and petroleum is that it has festered for so long. In an age when the epithets ?the world is a global village? and ?geography is history? have entered the lexicon of cliches, and Facebook and Twitter have dissolved social and physical boundaries, it is surprising that two government departments have not been able to break the silos of bureaucratic governance and settle an internal matter quietly and quickly. The message sent as a result of this dispute is that public institutions in India have not kept lockstep with the advances of technology. It suggests that decision-makers are still bound by the processes and rules set decades ago. And that notwithstanding the IT revolution, institutional mechanisms do not allow for the formulation of policy within a holistic and integrated framework.
What the shale gas example highlights is the importance of scenario planning. Unlike conventional planning, which is premised on linear forecasts, scenario planning looks to knit interrelated variables to define logically consistent alternative futures. Had scenarios been developed about the impact of shale gas and tight oil on the international market, I dare say we would have been better prepared to anticipate the environmental consequences.
World leaders face many challenges. They must manage competing and clashing interests, and walk the tightrope between the pressures of powerful advocates of narrow interest groups and the more diffused needs of society. And they must steer the ships of state through the stormy waters of a fiscal cliff in the US, the recession in Europe, civil strife in Africa and the Middle East, poverty in India and economic slowdown and social tension in China, without losing sight of their ultimate destination of sustainability. These challenges are not going to be easy to overcome, but the task could be facilitated if the structures and processes of institutions and planning were contemporised.
The writer is former chairman of Shell India. Views are personal
