Iran-US tensions and oil diplomacy: How India can reduce dependence on foreign oil

The only way the strategic vision of reducing dependence on foreign oil can be achieved is by getting the PMO and National Security Council/Niti Aayog to direct policy and regulatory change to increase the domestic output of this strategic commodity, as part of a national security calculus

By Ranjan Mathai

The relatively benign oil market environment India has enjoyed over the past five years could be upturned if push comes to military shove in the Gulf region. The Iranian regime will calculate, methodically, when seeking “revenge” for General Qasem Soleimani, but failure to act will exacerbate domestic challenges. In Trump, it faces an unpredictable adversary, focused on re-election, and seemingly less concerned by the fallout of a possible oil crisis than China and India would be.
Rising tensions in the Gulf are a primary concern for our policymakers as 60% of oil supplies, pass through the chokepoint of the Straits of Hormuz. News reports speak of steps being taken to diversify import sources further, but neither such late moves nor tapping into our Strategic Reserve will give us respite for more than a few weeks if Gulf oil flows get disrupted. For this lifeblood, India remains hostage to the world outside.

This vulnerability will persist if the International Energy Agency’s latest World Energy Outlook is to be believed. It says India’s oil demand will grow over 100% to 9 million barrels per day by 2040, with imports accounting for 90% of demand.

Obviously, our PM’s 2015 goal of reducing import dependence to 67% (from 77%) by 2022 is nowhere in sight; we are already at 84% import dependence and climbing. Oil adds Rs 8 lakh crore annually to the national import bill. Our limping economy is hardly in shape to absorb a shock of higher oil prices, which would be compounded if there is uncertainty over uninterrupted supply.The task of policymakers is not only to scout Africa, the USA and Latin America for new suppliers but to ramp up domestic oil production urgently. They could start by reviewing why, despite reforms called HELP, OALP, and Ease of Doing Business, India’s production has been in relentless decline.

The key takeaway from our oil producers, both public and private sector, is that they have not been given either the confidence or the incentive to take tough decisions on investment to either enhance output from producing fields or explore and develop new ones. Any investments made after PM’s 2015 call, for Exploration and Production (E&P) of new fields would bring oil to market in 2022 at the earliest. Therefore, the reform agenda should have applied to all producing fields, including those from the earlier NELP/pre NELP regimes which had kept the nation’s resource locked underground.

The responsibility for ignoring the perspectives of the PSUs and corporate boardrooms (which finally decide on putting up the investment) lies partly with the ministry of petroleum and natural gas (MOPNG), but much more with the ministry of finance (MOF) and tax authorities. The Association of Oil and Gas Operators of India wrote to these ministries many months ago for regulatory and tax relief, with marginal effect. To recap a key request: Speeding up the process of extension of expiring Production Sharing Contracts; interminable delays in amending the PSCs with extensions, has led to Work Programmes and budgets not being approved, hence, hindering petroleum operations. On tax, even the MOPNG was constrained to write to the MOF seeking relief for a despairing AOGO, from predatory tax officers, who were levying tax on Cash Calls, i.e., the contributions made by partners in a joint venture, to the operator for new investments! Show Cause notices, and Summons were sent on account of taxes claimed on Royalty payments to the Government of India!

The service tax demands fly in the face of opinions of many senior tax officials. Still, they persist, and vary from state to state depending on tax commissioners understanding of the oil business- or more likely the lack thereof! No wonder then, that it was reported that the global oil giant Exxon (which will transform once poor Guyana into a major oil producer) was reported to be seeking global arbitration in case of disputes with the government, as a precondition for investing in exploration in India!

For a sector not under GST, the extortionate tax demands for components in the cycle of E&P are cascading multipliers, making the cost of producing in India less viable. Oil producers already bear the unreasonable burden of cess on existing oil production—levied at 20% on the old Nomination blocks—which are still the mainstay of domestic output. The cess is demonstrably a disincentive for any incremental investment in these fields, driving costs higher than other countries. And so, India imports more oil without cess.

In June last year, as the Gulf tensions began to mount, China began a strategically directed bid to increase domestic oil production by 50% over five years. $77 billion will be invested to extract more out of producing oilfields, even with low productivity because of oil’s strategic importance. ONGC hands, who successfully built OVL’s joint ventures outside India, know that despite ageing fields and allegedly poor geology, India can also ramp up production. But they, and our successful private companies, are hamstrung by myopic regulators and taxes.

The only way the strategic vision of reducing dependence on foreign oil can be achieved is by getting the PMO and National Security Council/Niti Aayog to direct policy and regulatory change to increase the domestic output of this strategic commodity, as part of a national security calculus. Recent reforms suggest there is an understanding of the need for a different approach; what is needed now is implementing the changed perspective in real-time. We should not wait for a crisis to descend, to reduce our vulnerability to a world set in disorder.

Former foreign secretary, India. Views are personal

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