The negotiations between Iran and the P5+1powers on Iran’s nuclear programme have overshot the deadline of June 30, but the fact that they are still on indicates that a deal is possible.
If the deal comes through, it will, among other outcomes, allow Iran to freely sell petroleum. This will further push down the global prices of petroleum, which have already dropped since June 2014.
India must use this possibly longer window of lower energy prices to try to secure supplies and acquire oversees assets like oil and gas fields.
The price of India’s oil imports (the Indian crude oil basket) has fallen from $106.9 per barrel in June 2014 to $61.8 per barrel in June 2015.[1] India imports close to 3 million barrels per day of oil, and the drop has brought down, by 48%, the country’s fuel subsidy bill of $9.1 billion[2].
India’s public sector oil marketing companies—Bharat Petroleum, Hindustan Petroleum, and Indian Oil—which were earlier selling diesel and petrol at a loss, are now making money on these fuels and no longer need government subsidies.
A lower crude oil price has also led to a 13-15% drop in the retail price of diesel and petrol in India over the past 12 months, which has helped keep inflation down.[3]
Oil prices are down because of improved global supply from countries such as Canada, the U.S., Colombia, Brazil, Iraq and UAE, and a much lower growth in demand.[4] In its most recent meeting in early June, the OPEC group of oil exporters decided to not cut oil production for six more months.[5] The move will create a further downward pressure on oil prices.
Low oil prices are bad for oil producers, especially those with high operating costs, such as shale oil producers in the U.S. One result of the continuing low oil prices has been a consistent drop, by almost 50% over 28 weeks, in the number of rigs drilling shale oil and gas wells in the U.S.[6]
However, this has not, so far, translated into a major drop in oil production—only the smallest operators are the first to go, and even they can restart production at short notice if the prices become viable.
The real target of OPEC’s move is future oil production, because low oil prices will discourage investments in oil exploration and the development of oil fields where production costs are high. This will eventually push up oil prices.
Global majors have already started to cut back spending on exploration. For example, U.S. based ExxonMobil and ConocoPhillips have cut down 2015 investments by 12% and 32%.[7],[8] Shell has announced a $15 billion cut to capital expenditure over the next three years, and will defer or cancel 40 projects globally.[9] Reduced investments in oil exploration will mean fewer future discoveries and production.
Moreover, known oil reserves located in hard-to-reach places such as the deep-sea, including a recent discovery off Brazil, will not be financially viable at lower prices. In fact, the number of offshore drilling rigs in operation, used for exploring and developing undersea oil, is down 18% globally compared to 12 months ago.[10] Offshore rigs are expensive to hire, and less justifiable financially when oil prices are down. The reduced use of these rigs worldwide shows that cutbacks to spending are not restricted to a few companies.
Any cutbacks to exploration and development programmes are long-term and take several years to reverse, as was observed during the 2004-2014 period of high prices.
The cutbacks are commercial decisions taken by oil companies, but they will eventually lead to higher prices, as they have in the past. If the sanctions against Iran are removed, it could push the inevitability of rising prices further into the future. This is because Iran can produce an extra 700,000 barrels per day of oil at short notice.[11]
Iran’s oil production has fallen in the past four years with major buyers such as India cutting back purchases due to the sanctions. Additionally, Iran’s petroleum sector has been starved of technology and investment since the 1979 revolution, also because of the U.S.-driven sanctions. If these sanctions were to go, Iran can produce a lot more oil—its peak production during the 1970s was over 6 million barrels per day.[12]
Unlike shale oil or deep sea reserves, most of Iran’s oil is in accessible reserves and can be produced cheaply. Even at current prices, Iranian oil will come into the market in larger quantities, if sanctions were to go. This means oil prices will stay lower for longer.
For India, this will be an extended window of opportunity. Gateway House has recommended in the past that India should lock in the gains from lower oil prices by buying oil and gas fields in the current environment, where asset prices are down. Iran’s return to the oil market means this window of low prices will be open for a longer period. India must seize this opportunity.
Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.
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References
[1] Press Information Bureau, Global Crude Oil Price of Indian Basket Decreased Marginally to US$ 106.88 per Bbl on 02.06.2014, June 2014, http://pib.nic.in/newsite/erelease.aspx?relid=105383, and Daily Crude Oil Price of Indian Basket Was US$ 61.84/bbl on 29.05.2015, June 2015, <http://pib.nic.in/newsite/erelease.aspx?relid=122177>
[2] Ministry of Petroleum and Natural Gas, Notes on Demands for Grants, 2015-2016: Ministry of Petroleum & Natural Gas, 2014, <http://indiabudget.nic.in/ub2015-16/eb/sbe75.pdf>
[3]Ministry of Petroleum and Natural Gas, Historical: Revision in RSP of Sensitive Petroleum Products at Delhi, June 2015, <http://ppac.org.in/content/149_1_PricesPetroleum.aspx>
[4]International Energy Agency, Oil Market Report, May 2015, <https://www.iea.org/media/omrreports/fullissues/2015-05-13.pdf>
[5]Lawler, Alex, and Rania El Gamal, OPEC Agrees to Keep Pumping as Oil Glut Fears Persist, Reuters, June 2015, <http://www.reuters.com/article/2015/06/05/us-opec-meeting-idUSKBN0OK2KL20150605>
[6]Disavino, Scott, U.S. Weekly Oil Rig Count Decline Slows: Baker Hughes, Reuters, June 2015, <http://www.reuters.com/article/2015/06/29/us-energy-oil-rigs-baker-hughes-idUSKCN0P902320150629>
[7]AFP, ExxonMobil Cuts Spending but Predicts Higher Output, Yahoo News, March 2015, <http://news.yahoo.com/exxonmobil-cuts-capital-spending-falling-oil-prices-150140256.html>
[8]Tully, Andy, Shell, ConocoPhillips Announce Heavy Spending Cuts, Oil Price, February 2015, <http://oilprice.com/Latest-Energy-News/World-News/Shell-ConocoPhillips-Announce-Heavy-Spending-Cuts.html>
[9]Patel, Tara, ‘Big Oil’ Cuts $20 Billion in Five Hours to Preserve Dividends, Bloomberg, January 2015, <http://www.bloomberg.com/news/articles/2015-01-29/shell-profit-misses-estimates-on-oil-prices-as-spending-to-fall>
[10]Rigzone, Offshore Rig Utilization Reports, June 2015, <http://www.rigzone.com/data/utilization_trends.asp>
[11]British Petroleum, Statistical Review of World Energy 2015, 2015, <http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html>
[12]Ibid