Energy Security: India's Options

Shebonti Ray Dadwal, Research Officer, IDSA

 

Introduction

When we talk about energy security today, the focus is no longer on the possibility of global confrontation between the major powers as was the case during the Cold War period, but on the stability of prices, especially oil, and its repercussions on the demand/supply position of energy resources. Though the term "energy" covers the entire gamut of energy resources—primary, renewable and non-conventional—the focus of this paper will be on hydrocarbons, as the world today is running, albeit decreasingly, on oil, and it was the discovery of oil, and more recently gas, that brought the concept of energy security to the fore in the policy making decisions of nations.

Oil has been the primary source of energy almost all over the world for the last several decades now, so much so, that it represents 39 per cent of the total energy consumed worldwide.1 But with crude prices down to pre-1973 levels in real terms, mainly because of a glut in stocks, many analysts began questioning the relevance of "energy security" in the current context. However, it is perhaps more relevant today than it was a decade ago. Though consumers everywhere are rejoicing at the prospect of cheap, plentiful oil for the foreseeable future, if oil prices continue to remain as low as they are now, oil producers (both state companies as well as multinational corporations) will have to slash their exploration budgets, resulting in fewer investments and consequently, less production, from areas that are not cost-effective. Also, for countries that are dependent on oil for much of their revenues, low prices will mean increasing budget deficits, more borrowings and cost cutting. This, in turn, may lead to political instability in many of these countries. All the Gulf governments are suffering from the decline in oil prices. Most are repressive and unpopular. None has a sure hold on power.

The Persian Gulf region is privy to two-thirds of the world's cheapest reserves of high quality oil, while Russia has the largest reserves of natural gas (NG). Thanks to the high prices dictated by the Organisation of Petroleum Exporting Countries (OPEC) during the 1970s and 1980s, more expensive fields in the North Sea and elsewhere could be developed and crude sold at a profit. However, today with prices ruling low, most of the high cost oil producers are at risk of being put out of business. While Saudi Arabia and other major Gulf producers are being accused of deliberately flooding the market with oil in order to push smaller and more expensive producers out of the market, there is fear that it may not be long before prices decline to even as low as $5 per barrel, especially if cash-strapped Gulf states decide to produce more to increase revenues.2 This would, in turn, increase the danger of once again creating dependency on a few West Asian countries for oil. Once low prices move more production back to the Persian Gulf region, any instability caused by the overthrow of a regime could have repercussions on oil flows from the region as a whole (in 1979, the Shah's overthrow cut supplies for a few months but it was enough to trigger the second oil shock).

Though any such shock would be different today, as the world is less dependent on oil than it was previously, and the development of markets to trade oil and oil futures means that price signals are relayed faster and more efficiently, nonetheless, any interruption to oil supplies would be very damaging to the world economy, especially to the less developed or developing countries, which are, by and large, oil-dependent economies. Therefore, even with prices at an all time low, consuming countries should be alert to the dangers of oil dependence.

Over the last decade, it is the Asian economies like China, India, South Korea, Indonesia and Thailand which are consuming more energy than ever before. According to a World Bank estimate, the increase in energy demand in these countries will account for more than 40 per cent of the increase in global energy demands between 1990-2005. To meet this increasing demand for energy, these newly emerging economies will have to increase as well as diversify their domestic supplies and sources of energy—both conventional as well as non-conventional.

More and more countries these days are turning to NG as an alternative source of energy. As gas reserves continue to rise sharply while discoveries of new petroleum fields lag, most Asian countries realise that their future economic growth lies in the development of gas. For those countries which are heavily dependent on oil imports, NG not only signifies a diversification of energy sources but a more secure supply. And for developing countries like India, Pakistan and Thailand, which have limited liquid reserves, it is a necessary supplement to oil. Even net oil exporters, like Indonesia, Brunei and Malaysia, view NG as a replacement for oil for domestic use, thereby freeing oil for export; abundant reserves of gas also create more opportunities for liquefied natural gas (LNG) exports and ultimately pipeline exports.3 The reasons for this are: gas is cheaper, cleaner and plentiful, and in an increasingly environmentally conscious world, developed countries see this as an attractive alternative to oil and mineral fuels. Hence, oil-producing states in the Persian Gulf, like Qatar, Oman, Abu Dhabi and Iran (which has the second largest reserves of natural gas at 24,000 billion cubic metres or 19 per cent of world conventional reserves) are striving to develop their gas reserves to supplement their dwindling oil reserves.4

The India Scenario

India's Gross Domestic Product (GDP) growth rate averaged 6.5 per cent during 1992-97 and despite decreasing slightly to 5 per cent in 1997-98, it is expected to pick up again to around 6 per cent in 1998-99 and around 7 per cent thereafter for the rest of the Ninth Plan period. The demand for total primary commercial energy in India increased from 25.5 million tonnes of oil equivalent (MTOE) in 1953-54 to 212.9 MTOE in 1994-95, representing an increase of more than 8 times over a 40-year period, and is projected to increase to 770 MTOE by 2011-12. In per capita terms, the demand for primary commercial energy was 67 kilogram per oil equivalent (KGOE) in 1953-54. It increased to 234 KGOE in 1994-95 and is expected to increase to 648 KGOE by 2011-12. However, this is low compared to the international average of per capita energy consumption levels of 1,433 KGOE in 1994-95, and over 5,000 KGOE in the developed countries.5

Currently, India's oil consumption is around 80 million tonnes (m.t.) per year. If the GDP rate grows at a rate of 6 per cent, by 2020, India will be needing around 275 m.t. of oil (crude + petroleum products); if the GDP growth rate is 7 per cent, the requirement will be 350-400 m.t. The demand for gas also is expected to increase. Though India does not import any NG at present, imports are scheduled to start from 2001-02 when India is expected to import about 2.2 billion cubic metres (bcm). This is projected to increase to 12.8 bcm by 2005 and 25.5 bcm by 2010. Therefore, in this scenario, the security of oil supplies becomes important.

Since adequate energy resources are critical to maintain current and future economic development, the government has to make the necessary arrangements to make these energy resources available in sufficient quantities. Also with population growth pegged at 2.1 per cent per year, (by 2015, India's population, according to a 1995 World Resources Institute study, will stand at 1,394 million), and per capita income expected to rise considerably, the need for massive infusions of energy resources will be acute. However, not only is India's indigenous production of hydrocarbons inadequate to meet its growing requirements, the gap between demand and supply is expected to increase at an alarming rate.

The pattern of India's energy consumption has changed over the years. From the dominance of traditional or non-commercial fuels like fuelwood, dung and crop residues, the demand has shifted to commercial sources of energy, out of which coal, oil and natural gas are the main sources of primary energy, with coal dominating the total indigenous energy supply. India also has a large potential for hydroelectric power, estimated at 600 Bkwh (billion kilowatt hour), out of which only a fifth has either been developed or is under development. Another 94,000MW (megawatt) of probable potential also exists if 63 sites which have been identified can be exploited, while 6,789 MW of potential for exploitation through mini/micro hydel schemes also exists.6

India also has uranium resources, which are sufficient to meet the life-time requirement of the first stage of the country's nuclear development programme of 10,000 MW. Over and above this, about 363,000 tonnes of thorium oxide deposits are known to exist, which when used through breeder reactors, may produce 900,000 Bkwh of electricity. Currently, only 2.6 per cent of India's power consumption is met by nuclear energy. Although it is relatively expensive in terms of the capital costs, it is free from many of the problems discussed above, and should be given greater consideration as a viable alternative source of energy.

The industrial sector is the largest consumer of energy followed by the transport sector. While 99 per cent of coal and NG is used by the industrial sector, which is also the largest consumer of electricity with a share of 38 per cent in the total consumption, the transport sector is the largest consumer of petroleum products and accounts for nearly 50 per cent of the total energy consumption.7 Though the government has laid emphasis on developing unconventional or renewable energy resources, for the foreseeable future, India will continue to depend on primary sources of energy, especially oil and NG, as the economy is becoming progressively oil-intensive. This is due to the increasing use of oil products in sectors like household and transport with the share of oil and, more recently, NG, gaining ground over coal for environmental reasons.

However, the country is not self-sufficient in primary resources with its import dependence for oil, particularly, increasing over the years. Since 1984-85, when oil production was at its peak, India was importing only 30 per cent of its crude supplies. Since then, though production has been increasing, it could not keep pace with rising demand. Therefore, while production of crude was 33.02 million metric tonnes (MMT) in 1990-91, it has been more or less stagnant since then, with production at 33.87 MMT in 1996-97. As a result, India's self-sufficiency in petroleum products has declined from 60 per cent in 1985-86 to about 34 per cent at present.8

Natural gas accounts for about 8 per cent of energy consumption in the country. The current demand for NG is about 96 million cubic metres per day (mcmd) as against availability of 67 mcmd. The aggregate NG production during 1997-98 was 23 bcm and is likely to peak in the next two-three years. By 2007, the demand is expected to be around 200 mcmd. Nevertheless, a large gap is expected to develop between domestic supply and potential demand unless major new discoveries are made in the future. However, with long gestation periods needed for both oil and gas projects before they can become commercially viable, it is clear that large amounts of both oil and NG will have to be imported if the current rate of economic growth has to be maintained.

Some of the important questions that the planners will have to address are: (a) How long will resources, such as hydrocarbons, last? (b) What sort of strategy will have to be adopted—in the short, medium and long term—so that growing energy imports are met without compromising India's security or adversely affecting the balance of payments position? (c) What are the environmental consequences associated with intensive use of mineral and hydrocarbon resources such as coal, oil, etc?

Reserves vs. Demand

The country's proven recoverable crude oil reserves are likely to be of the order of 513 m.t by 2001-02, if no further accretion to reserves takes place. While the current production of crude is around 33 m.t., demand is around 84 m.t. By the end of the Ninth Plan, production of crude oil is expected to be 37 m.t. Natural gas reserves are placed at 660 bcm, with production around 78 mcmd. Demand, however, is around 96 mcmd.

Though the position regarding other energy resources like coal is comparatively better, mining is beset with environmental problems as it often leads to deforestation, diversion of land from agricultural to other purposes, etc. Also, greater use of energy would result in increased carbon emission and other pollutants, which in turn is likely to worsen the environmental problems.

With the demand for electricity expected to increase to 1,473 Bkwh by 2010-11, as against 394.5 Bkwh in 1996-97—representing an average increase of 9.1 per cent per year—and with a major portion of the generation likely to be gas-based, as coal-based thermal power plants are environmentally unfriendly, it would result in greater dependence on hydrocarbons and the consequent reduction in self-reliance. This, in turn, would have repercussions on the country's balance of payments position.

Tables 1, 2 and 3 show India's primary energy (coal, oil and natural gas) availability, demand and production.

Table 1. Energy Availability

(in million tonnes)

Year 1990 2000 2010 2020

Oil 33.0 37.3 41.5 45.7

Non-coking coal 250.0 406.4 604.3 802.1

Coking coal 39.8 49.7 49.7 49.7

Gas (in bn cu.m.) 12.8 26.5 — —

Table 2. Primary Energy Demand

(in million tonnes)

Year 1990 2000 2010 2020

Coal 219.7 393.3 569.2 872.3

Production 219.7 393.3 569.2 867.6

Imports — — — 4.8

Oil 56.7 105.0 195.8 297.3

Production 3.0 37.2 41.5 45.7

Imports 23.7 67.7 154.3 251.5

Gas (in

billion cu.

metres) 12.7 26.5 86.0 184.9

Production 12.7 26.5 17.7 14.1

Imports — — 68.3 170.8

Table 3. Production of Primary Commercial Energy

Units 1960-61 1970-71 1980-81 1990-91 1996-97

Coal MMT 55.67 72.95 114.01 211.73 288.65

Lignite MMT 0.05 3.39 4.80 14.07 22.54

Crude Oil MMT 0.45 6.82 10.51 33.02 33.87

Natural Gas MCM — 1,445 2,358 17,998 22,890

Hydro Power Bkwh 7.84 25.25 46.54 71.66 68.63

One way of meeting India's oil and gas requirements, is domestic production via more intensive exploration, both onshore and offshore. According to a Geological Survey of India report, India has 26 sedimentary basins out of which only six have been commercially explored.9 Realising that it lacked the capacity to take on the challenge by itself, the government decided to open exploration and production (E&P) to private sector participation. Since the 1980s, several bids have been held where acreage was offered to private companies on a production sharing basis and in March 1997, the government launched the New Exploration Licensing Policy (NELP) to attract more private sector participation, both domestic and foreign. However, the response has been lukewarm, mainly because most of the acreages on offer are deep-sea blocks, and require huge resources, and with the current drop in oil prices, the companies are wary of committing large funds in risky ventures. Also, the government was accused for offering fields which have low prospectivity, especially when compared to the regions in China, the Caspian Basin and Vietnam and the national companies had kept the best fields for themselves. Also, there were complaints that the data offered was inadequate.

Imports

Even if domestic production picks up, India will continue to remain and become increasingly dependent for imports of both oil and gas for the foreseeable future.

Table 4 shows the share of petroleum, oil and lubricants (POL) imports and exports as against total imports and exports:

Table 4. Share of India's POL Imports, 1970-96

(In Rs. billion)

Year Net POL Total Total Net POL As %

Imports Imports Exports Imports as Exports

% of Total

Imports

1970-7 11.3 16.3 15.3 8.1 8.6

1975-76 12.4 52.7 40.2 23.6 30.8

1980-81 52.6 125.5 67.0 41.9 78.4

1985-86 43.2 196.6 102.5 22.0 42.1

1990-91 97.7 431.9 325.5 22.6 30.0

1994-95 162.5 899.7 826.7 18.1 19.7

Therefore, the government has decided to acquire acreage in other countries to augment domestic supplies. ONGC Videsh Ltd., a subsidiary of the Oil and National Gas Commission (ONGC), has entered into a production sharing agreement with British Petroleum in Vietnam to explore for natural gas, which should start production in 2002. The company has also signed two contracts for oil exploration and production sharing in Iraq, though this is contingent on the UN embargo on Iraq being lifted. Other projects which are under negotiations are for exploration in Russia and Iran. Though some projects are also being negotiated with the Central Asian states of Turkmenistan and Uzbekistan for NG, and Kazakhsan and Azerbaijan for oil, the fact that these states are landlocked makes transportation costs prohibitive in the absence of agreed-upon transit routes and the unstable situation in the region. Also, operations there are expensive because of the harsh climate and difficult terrain, and given the current low price of oil, the seismic data received does not make any of the projects seem attractive. Most of the big projects there have already been taken up by the big oil consortia, and the small to medium projects would not be cost-effective from India's point of view. However, the Ministry of Petroleum and Natural Gas is contemplating importing oil and natural gas from Turkmenistan and Kazakhstan, as part of the policy to diversify our energy sources. Pipeline projects with both countries are economically viable as they could be laid directly from the source of gas supply. However, transit problems remain and any south-eastward-bound pipeline from the Caspian region would have to pass through Afghanistan, and the political situation in that country has so far prevented any project from being completed. Though Unocal and Delta had signed an agreement with Afghanistan and Pakistan to set up a 2,000-km Turkmen-Afghan-Pakistan NG pipeline to transport 55 mcmd of NG through a 1,400 km pipeline to Multan in Pakistan, with the possibility of extending the line a further 600 km to New Delhi, the ongoing insurgency in Afghanistan has prevented the project from going through, and late last year, Unocal announced that it was putting the project on hold indefinitely.10

Currently, however, most of India's energy needs are met by imports from the Persian Gulf states. While oil is shipped across the Arabian Sea, in the case of natural gas, the government is negotiating with a number of countries for supply of LNG to be transported by sea and later as piped gas. India has already signed agreements with Qatar and Oman to transport NG over a 20-year period, beginning 2001-02.

India is also in an advanced stage of negotiations with Iran for the import of NG via offshore or onshore pipelines. However, once again the pipelines would have to transit Pakistani territorial waters or land, and Islamabad has so far prevented India from conducting feasibility studies for laying sub-sea pipelines. In fact, for a while it seemed that the deal would fall through given the state of political relations between India and Pakistan. But of late, Pakistan has been assuring India that it would not disrupt supplies in case the Iran-India pipeline is laid on a land route through its territory. An earlier deal to transport NG via deep sea pipelines from Oman to India fell through as it was technically not feasible, given the prohibitive cost of laying deep sea lines, and Pakistan was against any lines passing through its continental shelf.

India is also looking eastwards for supply of NG. Both Bangladesh and Myanmar have huge reserves of NG and have been identified as potential suppliers. In fact, India and Myanmar have agreed to exchange geo-technology data of basins lying across the India-Myanmar border so that both sides could optimise their exploration programmes in these basins, and ONGC has also evinced interest in studying for exploration opportunities in Myanmar. But, despite its geographical proximity, political issues have so far prevented Dhaka from taking any concrete decisions to transport NG to India. Many international oil companies that have acquired blocks in Bangladesh are keen to supply gas to the large Indian market and the US in particular has been urging the Bangladeshi government to allow the construction of a pipeline to India, but with little success, so far.

Security

The increase in current as well as future import dependence has repercussions on the country's security. Since most of our oil imports are shipped across the Indian Ocean via tankers and LNG imports scheduled for 2001-02 are also to be sea-based, the question of the safety of shipping and the Sea Lanes of Communication (SLOC), has been the focus of a considerable amount of attention. This includes production from our offshore fields. Though an all-out war is a remote possibility, it cannot be ruled out completely as most of our present and future imports are sourced from West Asia and possibly Central Asia, which are politically volatile regions. Less than 15 years ago, a major battle was fought in the Gulf, which took a heavy toll on tanker traffic. Also, the Straits of Hormuz, through which a third of the world's energy supplies are routed, was blocked, causing a disruption of supplies, and this was followed a few years later by the second Gulf War after Iraq invaded Kuwait. Most of the Gulf states have territorial disputes with one another, and with an ongoing arms race, the potential for conflict is a constant possibility.

With consumption of hydrocarbons by Asian countries poised to increase dramatically over the next few decades, and low cost sources likely to be concentrated in a few regions, the competition for oil and gas will grow. Both India and China are projected to be the largest consumers of energy in the future with Japan and South Korea not far beyond. Since 1993, China has become a net importer of crude oil. In 1996, it faced a deficiency of around 22 m.t., and by the turn of the century, its oil shortage is projected to reach 54.6 m.t. if its GDP grows at the expected 7-8 per cent per annum. Like Japan and India, China too is dependent on much of its oil imports from the Persian Gulf region via the Indian Ocean and the South China Sea, while their future natural gas imports are also likely to come from common sources. Therefore, the guarantee of the security of SLOCs will remain a matter of prime concern for Beijing.11

Though a major naval battle which may disrupt our oil supplies is unlikely, one cannot rule out the possibility of terrorist actions such as the blowing up of oil and gas pipelines, and piracy. India is already facing a problem in this respect in the north-east, and pipelines would, therefore, have to be made secure against terrorist attacks, sabotage, internal unrest, etc.

For India, apart from military and defence-based actions, what is more essential is to develop its energy future. While this would involve a substantial restructuring of the economy towards more efficient use of energy, any imports via pipelines would necessitate cordial relations with not only source countries but also transit countries, including Pakistan. At the same time, the potential for disputes over ownership of offshore gas fields in the Arabian Sea is a distinct possibility with Islamabad. A breakdown in diplomatic relations with supplier countries would also disrupt supplies, therefore, the role of diplomacy should never be under-estimated. Good relations with potential supplier countries should also be pursued, as with the Central Asian countries, while tensions with neighbours like Bangladesh and China should be sought to be defused as imports from these countries can go a long way in bringing down transport costs.

Though pipelines could be a future source of tension, they could also be used to build more cordial relations with neighbouring (transit) countries as it would be to the mutual benefit of both, as a larger market would bring down costs. For instance, any pipeline targetting the South Asian market would not be cost-effective unless it included the huge Indian market. At the same time, a transcontinental pipeline network can be built, such as a pan-Asian pipeline, connecting several countries in a region as well as between regions, while foreign participation in terms of investment and financial stakes could ensure a degree of safety of a project and ensure the security for uninterrupted long-term supply of energy. This, in turn, could promote better relations among the transit countries.

Reforms

That the government realises the importance of energy for India's development can be seen from the fact that the Ninth Plan outlay for the key infrastructural sectors of energy, transport and communications has been increased by 35 per cent from Rs. 45,252 crore in 1997-98 to Rs. 61,146 crore in 1998-99.

In September 1996, a Cabinet note based on the recommendations of the R-Group (a group of experts on restructuring of oil industries) called for a phased dismantling of the administered price mechanism over a period of six years by which time it was envisaged that the petroleum sector would be totally deregulated and prices would be market-oriented.12

As per recommendations of the group, primary energy resources like coal, lignite, petroleum (other than crude) and its distillation products were delicensed and de-reserved from exclusive public sector production. The government also announced disinvestment of specified portions of equity from Gas Authority of India Ltd. (GAIL) and Indian Oil Corporation (IOC), as well as other reforms like buy-back of shares while inter-corporate investments without prior approval are to be allowed. Financial institutional investment norms have also been liberalised.

The Electricity Acts were amended to allow private investment in power transmission, and other laws were simplified. At the same time, foreign equity participation up to 100 per cent has been allowed for power generation, transmission and distribution (except those of atomic reactor plants). The tax holiday for the power sector has been extended to 2003.

In an effort to bridge the gap between supply and demand of NG, several measures have been taken—a joint venture between GAIL and British Gas for supplying gas to households in Mumbai, implementation of the Gas Flaring Reduction project by ONGC in the western offshore area, expanding capacity of the HBJ pipeline by GAIL and proposed commissioning of two new LPG plants in Assam and Maharashtra have been taken up in the current year. The JVC Petronet Ltd has been set up with GAIL, ONGC, IOC, and BPCL (Bharat Petroleum Corporation Ltd.) having 50 per cent equity and the balance by financial institutions for setting up LNG terminals at various points. To facilitate an optimal evolution of the sector, a proposal for setting up of a Gas Regulatory Authority is being considered.

In March 1997, the government launched NELP, offering incentives for increased exploration rights to both public and private sector companies, such as allotting an open acreage system to all as well as attractive investment incentives in the hope of attracting investment, both domestic and international, in exploration activities. However, with current oil prices being abysmally low, and allegations of low quality acreages being offered to private parties for exploration, the response has been below expectations.

Several projects for expansion of refinery capacity are also under consideration, such as setting up of refineries in Paradip and Bhatinda. Proposals to set up refinery residue-based power plants at Cochin, Panipat, Koyali and Kosikalan by IOC and at Chennai have been formulated.

The first phase of dismantling the administered price mechanism (APM) in the petroleum sector commenced in April 1998. The cost plus formula for indigenous crude oil producers and for shipping of crude oil have been withdrawn with a minimum floor price fixed as a temporary measure. Retention pricing for refineries has been abolished and refinery gate prices of certain controlled products like high speed diesel (HSD), liquid petroleum gas (LPG) are being fixed on "adjusted import parity pricing" basis for existing refineries, though their consumer prices are still administered. Prices of naphtha, fuel oil (FO), bitumen and paraffin wax have been decontrolled from April 1998 and free market operation has been allowed to oil companies.

Other measures include reduction in customs duty on crude oil from 27 per cent to 22 per cent from June 1998. In order to boost refining capacity for meeting future needs, the tax holiday has been extended up to 2003 for new refineries set up after October 1, 1998. Also petroleum (other than crude) and its distillation products have been removed from the list of industries reserved for the public sector and have been delicensed.

To promote greater investment in coal mining, the government has delicensed coal and lignite and they have also been removed from the list of industries reserved for the public sector.

The government has recently announced a policy on hydropower development with a view to exploiting the vast hydroelectric potential available in the country at a faster pace. It has been decided to encourage greater private investment through independent power producers (IPPs) and joint ventures (JVs), and several investments are to be offered to this effect.

Conclusion

With globalisation taking place, supply disruptions (whether availability or transport) from one region would affect all other regions, at least in the short term or till the market has time to adjust. For instance, a sudden increase or decrease in the price of oil can have serious consequences for both consumers and producers. In the case of supply disruptions, finding a substitute for petroleum products would be difficult in the short term as demand would be relatively inelastic.

For consuming countries, a rapid increase in price would affect everything, since the cost of energy is closely linked to day-to-day prices. While for most democratic countries, this would have negative implications, the industrially developed countries have efficient mechanisms for adjusting over time to high oil prices, like conservation, innovation and taxation, and most of the Organisation for Economic Cooperation and Development (OECD) countries maintain a strategic petroleum reserve which they could draw on to lower the market price of oil. However, for many newly industrialising countries which have not undertaken careful planning, steep rises in prices can be disastrous.

For producing countries, while high prices would increase their revenues, in the long term, a significant rise in oil prices will invariably lead to lower demand and an inevitable fall in revenues, which in turn would have political implications.

On the other hand, if prices continue to rule low, it would encourage consumption and lead to dependence on imported oil, though in the long term this may lead to reduced efforts in conservation and development of alternatives to petroleum. Also, low prices would mean less funds invested by producers on new oil infrastructure. This, in turn, is leading to pressure being applied on producing states like the Gulf countries to modify their restrictive oil policies and allow foreign investments into their oil sectors, both upstream as well as downstream.

By 2020, world demand for oil is estimated to triple that in 1970, with the demand for oil going up to 115 million barrels per day (mbd) from 71.6 mbd in 1997. Though the general opinion is that there is enough oil in the world to meet global demand for the next 10-12 years, the problem will be getting it out of the ground and guaranteeing distribution to the market place at an acceptable price. According to some analysts, production will start decreasing from 2010 onwards, leading to a hike in prices, with dire consequences for oil dependent countries.

The implications of dependence on foreign sources can be seen from the major oil shocks which have taken place so far. During the 1973-74 crisis, for example, India's import bill rose by over 50 per cent, while the direct overall adverse impact of the 1990-91 Gulf War on India's balance of payments for the fiscal year 1990-91 was estimated at Rs. 5,180 crore with inflation going into double digit figures for the first time and remaining at around 13 per cent for the next two years. India's economic growth also slowed down considerably. In the case of NG, after the discovery of large scale gas reserves in the north-east and an increase in output from offshore areas in Bombay High (BH), the government was euphoric and a number of fertiliser plants came up in Maharashtra, Gujarat, Madhya Pradesh, Rajasthan and Uttar Pradesh. Natural gas was also used for power generation by the National Thermal Power Corporation (NTPC). But expectations that output of oil and NG would continue to rise were dashed as, not long after, the uptrend in crude and NG production until 1989-90 became more irregular and there was a net decline in the output of crude to 27 m.t. by 1992-93. Since then production has been stagnating.

By the first half of the next century, India will be one of the top five consumers of petroleum products, even ahead of industrialised countries like France, the UK and just behind Russia and China. Therefore, it is imperative that policies for dealing with a possible oil shortage and consequent price hike are formulated and put into place in advance. Also, with oil reserves of the world being concentrated primarily in two of the most politically unstable regions, the dangers to the security of supplies become all the more relevant.

India's economic problems are complex in nature and can be solved only if a multi-pronged and integrated policy is formulated and implemented to deal with outstanding issues. The current trend in the international energy market shows a movement towards the formation of mergers of large oil companies, which may see the re-emergence of the dominance of giant oil companies which controlled and dictated policy vis-à-vis production and prices. In this scenario, energy-dependent countries like India will have to devise strategies to protect not only the security of their supplies but also keep their access to low-cost energy open.

One way of doing this is to intensify exploration of indigenous oil reserves. However, to do this, India needs large investments, which, under the present price regime, are not available. Also, the national oil companies face a resource crunch as they do not have access to the huge funds needed to expedite exploration projects, especially offshore ones. Possessing comparatively small equity bases, these companies face a disadvantage, especially in the international market when bidding for foreign acreage. Neither is their record in maintenance of discovered fields very good, and most Indian fields are facing decline or stagnation in production. It has been emphasised that the methods adopted for recovering reserves in an optimum manner have not been effective and unscientific methods of exploitation have led to sickness in oil wells as happened in Bombay High.

At the same time, it is necessary to reduce the country's dependence on hydrocarbons. Therefore, it is imperative that power generation through hydel and coal-based projects as well as the use of other non-conventional sources of energy should be encouraged, so as to leave the use of petroleum products to the transport, fertiliser and petrochemicals sectors. Therefore, exports will have to increase substantially. Efforts will simultaneously have to be made to reduce the oil intensity of the economy. This is particularly true of the transport sector. The share of railways in the total freight movement in the last few years has declined sharply vis-a-vis the roads sector. It is important to reverse this trend. The energy efficiency of movement by rail is better than that of roads and steps will have to be taken to encourage it. Since the early 1980s, growing numbers of vehicles have been plying the roads, particularly in the urban areas. This has resulted in greater energy (in particular oil) intensity, traffic jams and environmental hazards viz. air pollution. If unchecked, this problem could take serious dimensions in the years to come. It is, therefore, essential that these modes of transport are replaced by public modes of transport, viz. buses and whenever feasible by suburban trains, including mass rapid transport system (MRTS).

Fuel switching is yet another way to reduce dependence on oil. With oil producing countries cutting production in an attempt to raise prices, very soon, the oil market may become a sellers' market. The case with gas is different. The gas market in Europe is already saturated and the market for the future is in Asia. Even though the infrastructure to import gas has a long gestation period, thanks to the huge proven reserves spread over a larger area (Russia, the Caspian and Persian Gulf states as well as India's eastern neighbours), till 2020, gas is expected to remain a buyers' market. While arrangements with neighbouring countries for promoting joint ventures and getting oil and gas supplies on a reasonable basis are necessary, implementation of projects for utilising surplus NG from West and Central Asian regions with the establishment of fertiliser and petrochemical projects and the construction of sub-sea pipelines will also be helpful in reducing costs of imports and minimising outgo in foreign exchange.

Even if pipelines are used to import much of the imported oil and NG in the future, a major portion of these will still be dependent on tankers. However, India's port structure is inadequate to handle the expected hike in hydrocarbons imports. At present, India has 11 ports, and most of them are in dire need of expansion and modernisation. At the same time, the Indian shipping industry is also undersized with only 476 ships for both coastal and overseas trade, with a total of 6.88 million Gross Registered Tonnes (GRT)—less than 1.5 per cent of total world tonnage. Therefore, it is necessary that this problem is dealt with on a priority basis.13

Some of the strategies that can be adopted by the Asian countries as well as India to meet future challenges to their energy security are building stockpiles (including joint stockpiles), diversification of energy supply sources, increased capacity of fuel switching, demand restraint, and development of renewable energy sources.14 However, though all these options are feasible, their implementation will take time. Also for countries like India, reliance on stock-building would tend to be slow because of resource constraints. Nor is the market sophisticated enough or the monitoring agencies experienced enough to predict the supply situation in time to take necessary action. Insufficient storage capacity is another cause for worry and needs to be augmented if India has to increase its energy stock-build.

Despite the economic slowdown over the past year, and the sanctions that were imposed on India after the Pokhran tests, India continues to be regarded as an attractive market by overseas investors, mainly because of its sheer size and long-term potential, as well as the move towards liberalisation and market reform. However, there is need for further changes as well as quick implementation of the reforms announced.

The government has rightly devoted attention to the development of renewable forms of energy like biogas plants and wind energy capacity, and the solar photovoltaic programme has also made some progress.15 However, the hydrocarbon sector continues to be source of worry, and sectors like hydroelectric power and nuclear energy are not given adequate attention or resources. Since the government and the public sector undertakings (PSUs) do not have the wherewithal to take on the challenge by themselves, the government should expedite the entry of private investments and participation in different segments of the energy industry.

With demand for power generation projected to be 1,473 Bkwh by 2010-11, the major problem of the power sector is the optimum generation mix. In the short run, dependence on gas and oil-based plants seems inevitable on account of the relatively shorter gestation periods of these projects. But in the long run, the optimum mix has to be planned in such a manner that the bulk of the base load requirements is met from coal-based thermal electricity, and supplemented by nuclear electricity to the extent possible, while the peak requirement has to be met from hydro-electric stations and oil/gas based power. The use of oil for meeting base load requirements will have to be discouraged.

If domestic production remains constant at 37 million tonnes from 2001-02 and the anticipated recoverable reserves of 513 million tonnes, the crude oil reserves are likely to last only till 2015-16. These reserves could be completely exhausted in 2011-12, if it is assumed that 30 per cent of the demand of petroleum products will be met from domestic crude oil production. The situation for NG is marginally better.16 However, India also possesses potential of around 850 billion cubic metres of coal bed methane, 600 million tonnes of oil shale and 6,156 trillion cubic metres of gas hydrates. If these estimates are confirmed by detailed exploration, there will be a big improvement with regard to availability of energy sources for the growth of our country. But until and unless these new hydrocarbon sources are proved and developed, the demand for petroleum products in the years to come will have to be increasingly met from imports. This will put pressure on the balance of payments.

It is important that conservation of natural resources receives adequate priority, especially from the environmental angle. The danger of further deterioration in the quality of air and water is not unreal and so is the case with the quality of soil. Greater demand for land resources for food, fodder, fuel, water as well as for mining and other activities will put pressure on the availability and quality of land. Therefore, it is essential that these resources are used with utmost care so that growth is sustainable.

One of the main problems in taking a rational decision on natural resource use is the lack of an appropriate information system and a methodology for natural resource accounting. As a result, the depletion of the national asset base is simply not taken into account while evaluating alternative strategies. With the recent OPEC decision to cut oil production by 2 mbd, thereby negating much of the advantage India was enjoying because of the low oil price, the need for a pragmatic policy will be all the more necessary. While our own natural resources will have to be evaluated and utilised more efficiently, taking care that they are not over-exploited, technologies which conserve the use of these resources also need to be developed and promoted vigorously. The challenge to ensure that our energy security is taken care of for the next 50 years at least should be tackled in such a way that our social, security, economic and environmental demands are ensured.

 

note

1. Hasan Johar and Gawdat Bahgat, "The American Dilemma in the Gulf Region", Journal of South Asian and Middle East Studies, vol. XIX, no.1, Fall 1995.

2. Geoffrey Kemp, "The Persian Gulf Remains the Strategic Prize", Survival, vol.40, no.4, Winter 1998-99.

3. Petroleum Economist, September 1995.

4. Narsi Ghornam, "The Evaluation of Recent Gas Export Pipeline Proposals in the Middle East", The Iranian Journal of International Affairs, vol. VII, no.2, Summer 1995.

5. Government of India, Ninth Five-Year Plan Document on Energy, vol.II, 1997-2002.

6. Ibid.

7. Ibid.

8. The Hindu, March 23, 1999.

9. Vijay Kelkar, paper presented at the Third Lovraj Kumar Memorial Lecture, August 1996.

10. Public Opinion Trends and Analyses, Pakistan Series, vol. XXV, no. 270, November 22, 1997.

11. BBC Monitoring:Summary of World Broadcasts, Far East, vol. 2956, June 1997.

12. Times of India, March 8, 1997.

13. Rahul Roy Chaudhury, paper on "India's Energy Security Needs" presented for IDSA project on "Peace, Security and Economic Cooperation: India and South Asia in the 21st Century," July 1998.

14. International Energy Agency Monthly Oil Market Report, January 15, 1999.

15. TERI Yearbook, 1997-98.

16. See n. 6.