Is there cause for op­ti­mism in oil in­dus­try?


Resource Digest - - CONTENTS -

The un­end­ing con­tro­versy over the ad­vis­abil­ity of ex­tin­guish­ing high-de­nom­i­na­tion cur­rency bills has dis­tracted the na­tion the way a likely rise in crude oil prices in the new year and 2018 could de­rail many of New Delhi’s macroe­co­nomic cal­cu­la­tions.

Ex­cept for a brief pe­riod at the start of the Na­tional Demo­cratic Al­liance rule, the task of Union Fi­nance Min­is­ter Arun Jait­ley to keep in­fla­tion un­der check, even when the coun­try reeled un­der se­vere drought for two years in a row, and re­duce the cur­rent ac­count deficit was made eas­ier by low crude oil prices.

In a pru­dent move, in­stead of pass­ing on to users in full the low crude oil prices, New Delhi in phases raised the spe­cific ex­cise duty on diesel and petrol to shore up its cof­fers. But as the slide in crude oil prices, start­ing in mid-2014 from well over $100 a bar­rel to $26.05 in Fe­bru­ary, proved a bless­ing for en­ergy-in­ten­sive In­dia, there was also a flip side to it. Mo­torists and agri­cul­tur­ists, be­cause of the low price, lifted In­dia’s crude oil use by 11.08 per cent to 183.5 mil­lion tonne (mt) in 2015-16. This led to the coun­try rais­ing crude im­ports by 13 mt to 202 mt last year, while in­dige­nous crude pro­duc­tion stag­nated at around 37 mt, thanks to in­vest­ment shy­ness in new sub­stan­tial sources of crude oil. As a re­sult, the coun­try re­mains nearly 80 per cent im­port depen­dent for crude oil.

Global over­sup­ply of crude oil, re­sult­ing from the aban­don­ment of pro­duc­tion ceil­ings by the Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries (OPEC) and car­tel leader Saudi Ara­bia’s de­ci­sion to go on pump­ing oil at op­ti­mum level to hold on to its mar­ket share, kept en­ergy prices highly af­ford­able for all im­port­ing na­tions.

It is be­cause of this that In­dia’s crude oil im­port bill was down to $64 bil­lion in 2015-16 from $112 bil­lion in the pre­vi­ous year, though the im­port vol­ume was up. But all im­port­ing na­tions, in­clud­ing In­dia, re­ceived a jolt when in Novem­ber OPEC

mem­bers reached their first con­sen­sus since 2008 to cut oil pro­duc­tion by 1.2 mil­lion bar­rels per day (bpd) to 32.5 mil­lion bpd from Jan­uary. Then, in De­cem­ber, NON-OPEC mem­bers, no­tably Rus­sia, agreed to shave their out­put by 558,000 bpd.

The NON-OPEC cut, though short of the tar­geted 600,000 bpd, is go­ing to be the largest-ever con­tri­bu­tion to pro­duc­tion dis­ci­pline by the in­dus­try. Ex­pect­edly, the bench­mark Brent crude was up more than 4 per cent to $56.64 a bar­rel, the high­est since July 2015, im­me­di­ately on the an­nounce­ment of the NON-OPEC de­ci­sion.


No won­der, then, Vedanta Chair­man Anil Agar­wal is keener than ever to put big money into crude oil, read­ing all the pos­i­tive price es­ti­mates by an­a­lysts in the two pro­duc­tion-cut agree­ments. He sees in In­dia’s hy­dro­car­bon sec­tor, in­clud­ing prospect­ing for shale oil and gas, many “ex­cit­ing op­por­tu­ni­ties to ex­plore.”

Agar­wal has plans to in­vest at least `30,000 crore in ex­plo­ration and pro­duc­tion by Cairn In­dia in the next three years. The in­vest­ment will step up Cairn’s oil pro­duc­tion from 250,000 bpd to 350,000 bpd. In the process, the com­pany’s share in the coun­try’s crude pro­duc­tion will jump from 30 per cent to 50 per cent. The scope for oil ex­plo­ration in In­dia is huge as “we are do­ing it in just about 10 per cent of our basins against 90 per cent in many coun­tries,” says Agar­wal.

This apart, his am­bi­tion to pro­duce shale oil and gas on a large scale in Ra­jasthan stands to get a leg up from the 29 per cent price gain fore­cast for oil in 2017 on last year’s average based on the me­dian of 24 an­a­lyst es­ti­mates com­piled by Bloomberg.

Ahead of Vedanta’s takeover of Cairn In­dia, a for­mer chief ex­ec­u­tive of the com­pany had said: “At Ra­jasthan, we see the pres­ence of tighter gas and oil re­sources that lend them­selves well to shale gas ex­plo­ration.” Agar­wal has promised not to take much time to ven­ture into shale once New Delhi is ready with the pol­icy for the sec­tor.

Per­haps, the most im­por­tant in­no­va­tion of the cen­tury, the tech­nol­ogy, a com­bi­na­tion of hor­i­zon­tal drilling and hy­draulic frac­tur­ing that al­lows ex­trac­tion of oil and gas from oth­er­wise un­yield­ing shale rocks, her­alded the shale rev­o­lu­tion in 2008-09 first in the US and then in Europe.


The US oil in­dus­try had peaked in 1970 and then went through many years of unchecked de­cline till 2009 when the shale break­through gave it the de­sired en­ergy se­cu­rity. More­over, ben­e­fit­ing from the shale boom, which was very largely aided by high crude oil prices, the US sprinted into a po­si­tion to nearly match the pro­duc­tion of Saudi Ara­bia and Rus­sia. These three pro­duc­ers ex­tract a third of the world’s crude oil. Long stand­ing dif­fer­ences with Iran apart, which had to be set aside to pro­mote pro­duc­tion dis­ci­pline, what led Riyadh to pump oil with­out re­stric­tion was to force high cost pro­duc­ers else­where, par­tic­u­larly the up­start shale groups in the US, to shut op­er­a­tion.

Many small shale oil pro­duc­ers were brought to their knees by sub­se­quent price col­lapse and the US rig count fell by more than 70 per cent from when oil was well over $100 a bar­rel. In­ter­est­ingly, as in­dus­try ob­servers point out, none of the US big and mid-sized shale oil pro­duc­ers pump­ing more than 100,000 bpd had col­lapsed due to the price fall.

The new mantra in the in­dus­try is to be “fit at $50 a bar­rel.” With brent trad­ing at close to $57 a bar­rel and the US bench­mark West Texas In­ter­me­di­ate at around $54, and the like­li­hood of prices firm­ing up a lit­tle more in case OPEC mem­bers and NON-OPEC pro­duc­ers don’t “cheat”, the US shale out­put could get a pro­duc­tion boost of 500,000 bpd to 4.5 mil­lion bpd. Crude oil pro­duc­ers of all sizes went through the rigours of cost cut­ting since mid-2014 to be able to meet div­i­dend ex­pec­ta­tions of share­hold­ers and in­vest­ment re­quire­ments. They all are still at the ex­er­cise. You could see oil to gush out of US fields, in­clud­ing shale wells, if oil re­mains around $60 a bar­rel. Won’t that lead Saudi Ara­bia and oth­ers to re­think their pol­icy?



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