Crude check

A long-term strat­egy to re­duce oil im­port de­pen­dence is called for

The Hindu Business Line - - THINK -

Oil prices have let off a bit of steam over the past week. But there is no room for com­pla­cency. Oil is no­to­ri­ously fickle and try­ing to fore­cast its move­ment is a mug’s game, with mul­ti­ple global fac­tors and un­cer­tain­ties at play. Few an­tic­i­pated the fuel’s crash from triple dig­its in 2014 to less than $30 a bar­rel in 2016. Fewer an­tic­i­pated the more-thandou­bling since then to more than $80 a bar­rel now. While noth­ing can be ruled out, oil at $100 a bar­rel, pre­dicted by some an­a­lysts, seems un­likely even af­ter the US sanc­tions on Iran (which will kick in from Novem­ber 4) come into force. Other OPEC na­tions, pri­mar­ily Saudi Ara­bia, are ex­pected to step up oil out­put to com­pen­sate for the short­fall aris­ing from the sanc­tions. Also, the pos­si­bil­ity of China con­tin­u­ing to im­port oil from Iran in the wake of its trade war with the US could mean lower-than-ex­pected sup­ply dis­rup­tions. The EU na­tions are re­port­edly plan­ning a ‘spe­cial pur­pose ve­hi­cle’ to work­around the US sanc­tions.

That said, the coun­try needs to pre­pare on a war foot­ing to shield it­self from fu­ture oil sup­ply dis­rup­tions and price shocks. In con­trast to the Prime Min­is­ter’s goal of re­duc­ing oil im­ports by 10 per cent by 2022, the de­pen­dency has only in­creased over the years to 83 per cent now. This needs to be re­versed. For this, do­mes­tic oil pro­duc­tion, that has been largely stag­nant, needs a booster shot. The HELP (Hy­dro­car­bon Ex­plo­ration Li­cens­ing Pol­icy) regime of 2016 sought to ad­dress pain points in do­mes­tic ex­plo­ration and pro­duc­tion, with pro­gres­sive pro­vi­sions such as uni­fied li­cens­ing pol­icy (that lets ex­plo­ration of all hy­dro­car­bons in a block) and open acreage li­cens­ing (that al­lows on-tap bid­ding). The first round of block al­lo­ca­tions un­der the open acreage auc­tions was a step in the right di­rec­tion.

More auc­tions are slated. Rightly so, given that a vast por­tion of In­dia’s sed­i­men­tary basins are un­ex­plored. But it is also im­por­tant to en­cour­age par­tic­i­pa­tion from more do­mes­tic ex­plor­ers and also for­eign play­ers, who were miss­ing in ac­tion in the first round. Also, what will re­ally mat­ter is for the ex­plo­ration to trans­late into sig­nif­i­cant pro­duc­tion within a rea­son­able pe­riod. For this, the Cen­tre must en­sure a sta­ble reg­u­la­tory, and fi­nan­cially vi­able, regime for pro­duc­ers. It should build more strate­gic petroleum re­serves and en­sure timely com­ple­tion of these projects. The PSU oil com­pa­nies should have ad­e­quate flex­i­bil­ity in oil sourc­ing con­tracts. They should also be en­cour­aged to use de­riv­a­tive in­stru­ments to hedge against ris­ing prices. The Cen­tre must ac­tively en­cour­age sub­sti­tu­tion of oil-based prod­ucts with elec­tric­ity and re­new­ables. This will, how­ever, take time to achieve crit­i­cal mass due to tech­no­log­i­cal and fi­nan­cial chal­lenges.

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