PIOCCI Background Brochure ( ONGC & GAIL)
Topic: “Role of BRICS in Energy Security”
The oil price plunge since June 2014 may have been deemed as a boon for the global economy. But, that depends on where one stands, as a producer or user. BRICS economies also felt the impact.
Fiscal impacts have been negative where taxes on exports/ consumption of oil constitute an important source of government revenues as in the case of Russia. Though, it has been positive with respect to outlays with energy subsidies like in the case of India. The overall net impact on global GDP is expected to be positive. Besides a boost to global demand derived from the transfer of purchasing power from oil producers to consumers, lower oil prices have widened the space for (temporary) expansive monetary policies and enabled lower government spending with fuel subsidies.
Crisis for Russia as Exports Plunged
Oil and gas account for more than 70% of Russia’s exports and nearly half of its budget revenues. Russia’s economy has suffered a strong negative impact from lower oil prices. The energy sector is responsible for 17-25% of its GDP.
The oil price fall has come on
top of economic sanctions from the EU, Japan and the US related to the Ukraine crisis.
While balance-of-payments current account balances have remained positive, annual
resident capital outflows were running at 4-5% of GDP as of December 2014.
Devaluation pressures on the Ruble stemming from geopolitical risks increased after the oil price fall gathered pace. As a result, not only has annualized inflation moved above 10% this year, but also the US$600bn foreign debt of Russian banks and non-banking firms became an increased source of concern. Although large foreign reserves may still serve as a buffer against balance-of-payment crisis, real GDP is expected to slump by more than 3.5% this year, followed by another 1.5% in 2016.
China, India, and South Africa Benefit As Consumption Economies
According to World Bank estimate a 10% decrease in oil prices is expected to lift growth in oil-importing economies by something in the range of 0.1-0.5 percentage points, depending on the share of oil imports in GDP. Positive fiscal and current-account impacts are also expected. So clearly China, India, and South Africa are beneficiaries.
As per World Bank, China will experience an activity-boosting effect of lower oil prices in the range of 0.1-0.2%, given that oil comprises only 18% of energy consumption. A deflationary impact is also on the cards, although it will be limited as energy and transportation correspond to less than 20% of the CPI. Fuel subsidies amount to only 0.1% of GDP, so fiscal impacts will not be significant. On the other hand, as China remains the second-largest world importer, lower oil prices throughout 2015 and 2016 will likely raise its current account surplus by 0.4-0.7 percentage points of GDP.
Sweet Spot India and South Africa
India has an oil import bill of 7.5% of GDP and has derived high terms of trade gains from the oil price evolution. Furthermore, its challenges with fiscal deficits and high inflation have been made easier. The government has already taken the opportunity to phase out diesel subsidies and hike taxes on oil derivatives. Falling oil prices have also helped to bring inflation down to less than 4.5% a year last December, opening space for some monetary policy loosening ahead.
South Africa is also a net importer of oil and a beneficiary from lower prices, including by corresponding effects on inflation and the import bill. As far as current-account deficits and GDP are concerned, recent oil price developments have come as a relief after the previous decline of prices of metals and minerals that comprise a substantial chunk of the country’s exports and GDP.
Mixed Bag for Brazil
Brazil has a small deficit on its oil foreign trade — as compared to the other countries and that qualifies it for potential benefits of declining prices both on its current-account deficit and as a facilitator for an undergoing domestic price realignment of oil derivatives.
On the other hand, the new international price regime and levels have come at a moment in which strong bets on future oil-related investments had been made in previous years, toward an expected crossing of the threshold to the group of net-exporting countries. Together with the unfolding corruption scandals in state-controlled Petrobras, world oil price developments have prompted a full downward review of such investments. It has really hurt the country’s chances.
Road Ahead: Great Potential in Cooperation among BRICS Nations
Considering the recent crash in Oil and Gas market it become imperative for BRICS countries to come closer and increase their cooperation in Oil and Gas sector as Countries like Russia is a major exporter of Oil and Gas, whereas India, China and South Africa are the biggest importers and consumers of Oil and Gas.
BRICS Summit Should Facilitate
In such a situation, the Platform of BRICS Summit can be used as a facilitator for Policy
Makers of all 5 countries to increase cooperation among nations in the field of Oil and
Gas. Interestingly, India already has committed huge investments in Russia Oil and Gas
blocks via National Oil Companies (NOC) like OVL, OIL, BPCL and IOC. On the other
hand China is also keen on investing heavily in the country. All these countries should
come together to form a consortium in the Oil and Gas space.
USP of Indian Oil and Gas Space
- Backed by discovery of new oil fields, domestic oil output has reached to around 1 MBPD by FY16.
- India’s energy consumption is estimated to reach 4.0 MBPD of oil and 119.05 bcm of LNG during current fiscal.
- India’s energy demand is expected to double to 1,516 Mtoe by 2035 from 637 Mtoe in 2014.
Moreover, the country’s share in global primary energy consumption is projected to increase two fold by 2035
- In June 2015, total crude oil imports were valued at US$ 8.7 billion. In FY14, imports accounted for more than 80 per cent of the country’s total oil demand.
- In FY15, India had 223.3 MMTPA of provisional refining capacity, making it the second largest refiner in Asia an. By 2017, the oil refining capacity of India is expected to rise and reach more than 310 million tonnes. Private companies own about 29.31 per cent of total capacity.
- India has become the third-largest energy consumer in 2015.
- In 2015,oil production in the country reached 0.75 mbpd as compared to 0.76 mbpd in 2014, registering a decline of 0.85 percent. In 2014, country had, 5.7 billion barrels of proven oil reserves.
- India had 1.4 tcm of gas proved reserves and produced 33.66 bcm of gas in 2015 which is expected to rise and reach 33.73 bcm in 2016.
- India had 1.4 trillion cubic meters of proven natural gas reserves at the beginning of 2014. Approximately 34 per cent of total reserves are located onshore, while 66 per cent are offshore.
- Despite being a net importer of crude oil, India has become a net exporter of petroleum products by investing in refineries designed for export, particularly in Gujarat.
- On the other hand, with India developing gas-fired power stations, consumption is up more than 160 per cent since 1995. Gas consumption is likely to expand at a Compound Annual Growth Rate (CAGR) of 21 per cent during FY08–17. Presently, domestic production accounts for more than three-quarters of the country’s total gas consumption.
- India is the fifth-largest Liquefied Natural Gas (LNG) importer after Japan, South Korea, the United Kingdom and Spain and accounts for 5.5 percent of the total global trade.
- The LNG imports had increased by 43.38 per cent year-on-year in May 2016 to 2.08 Billion Cubic Metres (BCM).
- Domestic LNG demand is expected to grow at a CAGR of 16.89 per cent to 306.54 Million Metric Standard Cubic Meter per Day (MMSCMD) by 2021 from 64 MMSCMD in 2015.
- The country's gas production is expected to touch 90 Billion Cubic Metres (BCM) in 2040 from 35 BCM in 2013. Gas pipeline infrastructure in the country stood at 15,808 km in December 2015.
- State-owned Oil and Natural Gas Corporation (ONGC) dominates the upstream segment (exploration and production), accounting for approximately 68 per cent of the country’s total oil output (FY14).
- Indian Oil Corporation Limited (IOCL) operates 11,214 km network of crude, gas and product
pipelines, with a capacity of 1.6 MBPD of oil and 10 MMSCMD of gas.
This is around 30 per cent of the nation’s total pipeline network.
IOCL is the largest company, operating 10 out of 22 Indian refineries, with a combined capacity of 1.3 MBPD.
- India and Iran have signed agreements related to crude oil imports, petrochemical complexes and gas field development, in addition to India committing to invest US$ 20 billion in the port of Chabahar in Southeastern Iran.
- The Union Cabinet has allowed state-owned oil firms to evolve their own crude oil import policies which involve freedom to choose source companies as well as pricing for their crude oil imports, thus allowing them to compete in the market effectively.
- In a major drive to enhance the petroleum and hydrocarbon sector, Government of India has introduced initiatives like the Hydrocarbon Exploration Licensing Policy (HELP), Marketing and Pricing freedom for new gas production, grant of extension to the Production Sharing Contracts and assigning the Ratna offshore field award to Oil and Natural Gas Corporation (ONGC) for development.
- Mr Dharmendra Pradhan, Minister of State (Independent Charge) for Petroleum and Natural Gas has released the Hydrocarbon Vision 2030 for North East India, with the objective of leveraging the north-eastern region’s hydrocarbon potential, enhance access to clean fuels, improve availability of petroleum products, facilitate economic development and to involve local population in the economic activities in this sector.
- The Ministry of Petroleum and Natural Gas has announced a new 'Marginal Fields Policy', which aims to bring into production 69 marginal oil and gas fields with 89 million tonnes or Rs 75,000 crore (US$ 11.12 billion) worth of reserves, by offering various incentives to oil and gas explorers such as exemption from payment of oil cess and customs duty on machinery and equipment.
- PAHAL - Direct Benefit Transfer for LPG consumer (DBTL) scheme launched in 54 districts on November 11, 2014 and expanded to rest of the country on January 1, 2015 will cover 15.3 crore active LPG consumers of the country.
- The Government of India launched the 'Give It Up' campaign on LPG subsidy that helped it save Rs 140 crore (US$ 20.75 million) as on July 22, 2015 with nearly 1.26 million Indians registering for the cause. As per recent statistics from oil ministry, as many as 30,000 to 40,000 households are giving up LPG subsidy each day.
- Government has launched Ujjwala Yojana (PMUY) to provide 5 crore free gas connection to BPL household in next 3 years.