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13 August 2015, Gateway House

A plan for India’s ‘energy independence’

It is time for India to become autonomous on the energy front, even though it is, and will remain, a large importer of petroleum and coal. A combined strategy of diversification by using other forms of energy, and acquisition by buying oil fields, can help India reach this goal

Fellow, Energy & Environment Studies Programme

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India supports one-sixth of the world’s population on less than 2% of the global land mass. This means that the country will not be able to meet all its needs for natural resources and energy from within its borders. India has been a major importer of petroleum for several decades, and is now a major importer of coal as well.[1] The dependence on imports for energy will only increase as India’s economy expands.

In this context, “energy independence” is the ability to access the required quantity of energy at a fair, transparent price. India can secure its energy independence through a mix of diversification and asset acquisition.

Diversification

The Indian economy relies on coal for electricity, and on petroleum for transport. Any adverse development—a political problem in one of the oil exporting states, trouble with logistics, or environmental activism against specific fossil fuels—could hurt India.

This near-complete reliance on coal and petroleum represents a risk to the economy, and reducing the dependence on these two products has to be one part of any plan for India’s energy autonomy.

Coal and lignite account for nearly 80% of India’s electricity generation.[2] Natural gas, hydropower, and nuclear energy constitute the rest. India must expand the role of these three fuels. India is already working on tripling its nuclear energy generation, with the construction of new reactors using indigenous and foreign technology.[3] This process has so far been slow and needs to be speeded up.

For hydropower, in addition to developing domestic resources, India must also build up trade with its immediate neighbours—Bhutan and Nepal. Both have significant hydropower potential,[4] which cannot be realised without India’s help or access to the Indian market. India has already funded the development of hydropower projects in Bhutan, from which it purchases electricity; it is in the process of negotiating more such projects. A similar approach with Nepal must be expedited.

Natural gas has the potential to reduce the dependence on coal as well as petroleum. India has 23,000 megawatts of gas-fired power plants, or almost 10% of the installed power capacity. These plants operate at a fraction of their rated capacity because of a shortage of fuel.[5] India can use the current weakness in the global price of liquefied natural gas (LNG) to tie up fuel supplies for these power plants, and get them back into action. Apart from reducing the reliance on coal, it will also help these stranded assets to become more productive.

Natural gas, which can be used as a vehicle fuel as compressed natural gas (CNG), can also help India cut down on its petroleum requirements.  At present, close to 1.5 million vehicles use CNG as fuel in India.[6] But this is less than 1 % of India’s vehicle fleet and confined mostly to New Delhi, Mumbai, and some cities in Gujarat. Creating the necessary infrastructure can help bring about this transformation in other large cities as well.

Natural gas is less polluting than coal and liquid petroleum, so the use of more gas will also be environment-friendly. Additionally, natural gas imports will come from a set of nations—such as the U.S., Australia, Qatar, and Mozambique—that is different from the countries that supply oil to India—Saudi Arabia, Iraq, Kuwait, Iran, and the United Arab Emirates. This will mean lower vulnerability to disruptions in any one source.

Acquisitions to secure prices

India imports over 70% of its petroleum needs, and over 60% of the imports come from the West Asia.[7] Political unrest in any of the major players, or a conflict, could affect oil flows. India can try and source more petroleum from other sources, such as South America and Russia, but it will still need to rely on West Asia for the bulk of its requirements.

If the supply from West Asia is reduced—because of a political disruption or major unrest—it will have an immediate impact on petroleum prices, which will hurt India. It is therefore meaningless to only physically diversify without securing prices.

Unlike the past, today it is possible to secure prices as well. India has this rare opportunity right now, which must be utilised: the drop in petroleum prices has hit the profitability of oil and gas companies globally, and the market values of many of these firms have fallen by 50-75%. Some of these companies are in financial distress because of the drop in cash flows brought about by the fall in oil prices. Some of these firms, or their oil fields, can be bought by India at a low price.

UK-listed Tullow Oil is an example. This company shot to fame on the back of large discoveries in Uganda. It has a portfolio of oil and gas fields in several African nations and elsewhere, adding to 1,254 million barrels of oil equivalent.[8] But the market value of this company is down by 68.5% in the past 12 months and it is currently valued at $3.26 billion. It means this oil can be acquired for just $2.6 per barrel, plus field development costs. Similar falls have occurred in other small and mid-size oil companies, listed in the stock exchanges of London and New York. India can acquire these companies or their assets.

If India owns such fields, it will mean that the financial impact for the country of any future spike in petroleum prices will be substantially blunted.

Meanwhile, in the immediate future, India can use the financial markets—the exchanges in London and New York—to lock in the price of its near term petroleum needs at current low levels.

If India judiciously uses this mix of diversification and acquisitions, it can secure its energy independence.

Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House

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References

[1] British Petroleum, Statistical Review of World Energy 2015, , <http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html>

[2] Central Electricity Authority Grid Operation and Distribution Wing, Operation Performance Monitoring Division, 1 April 2015, <http://www.cea.nic.in/reports/monthly/generation_rep/tentative/mar15/tentative-mar15.html>

[3] Lok Sabha, Nuclear Power Plants, 26 November 2014, <http://164.100.47.132/LssNew/psearch/QResult16.aspx?qref=6328>.

[4] Central Electricity Authority, Hydro Related Reports/Documents, <http://www.cea.nic.in/hydro_wing.html>

[5] Central Electricity Authority, Energy Generation, Programme, and Plant Load Factor for Gas / Liquid Based Stations,. <http://www.cea.nic.in/reports/monthly/generation_rep/tentative/jul15/opm_17.pdf>.

[6] ‘Indian Petroleum and Natural Gas Statistics 2013-14’, 1 October 2014, <http://petroleum.nic.in/docs/pngstat.pdf>, p. 53

[7] ‘Rising Demand of Crude Oil’, 21 July 2014,  <http://164.100.47.132/Annexture_New/lsq16/2/as186.htm>

[8] Tullow Oil, 2014 Full Results, <http://www.tullowoil.com/media/docs/default-source/3_investors/2014-full-year-results-fact-book.pdf?sfvrsn=4>,  p. 2

 

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