Will India do a US in oil reserves?

Mon, 23 Mar Pre-Open

   03:30 pm   

   Previous Close   

   09:30 am   

   01:30 pm   

   11:30 am   

   Closing   

The role of energy sufficiency in deciding the future of an economy can hardly be overstated. However, India does not project a promising image in this regard. As we all know, 80% of the oil requirements of India are imported. Hence, movement in crude prices and geo political events that have a bearing on oil prices have significant implications for Indian economy. In fact, it would not be wrong to say that much of the optimism in Indian economy now is directly or indirectly a result of weakening in the crude prices. The same has a multipronged impact on current trade deficit (oil imports comprise a significant share of imports), fiscal deficit (oil subsidies) and overall inflation levels and interest rate trends in the economy.

However, the global conditions are unlikely to remain benign forever. The only statement that be made confidently about oil prices is that they are volatile.

The ground work to make India self sufficient with regards to meeting its oil needs has just begun (reforms like diesel price deregulation and gas price hike). The US has with its shale gas reserves, made itself one of the biggest energy sufficient economies. In fact it now offers stiff competition to the OPEC.

Given the structural and reform scenario, it will take years before India meets a large share of oil needs from domestic production despite putting in the best efforts. Until then, perhaps the best we can do is to make hay while the sun shines. In other words, build reserves in a low oil price scenario to shield economy from potential shortage in the oil supplies or rise in oil prices.

In this context, we welcome the Government's decision to build oil reserves. As suggested in article in Economic Times, the Government may rope in private and state refiners from West Asia to build oil reserves worth Rs 200 bn. It is further considering offering some tax sops to incentivize global firms to build and use these reserves. We are nearing completion of building three reserves worth capacity of 5 mmt in the first phase. The first reserve is built and is waiting to be filled. And the other two are likely to be ready by the end of this year.

Further, the second phase is likely to build reserves worth Rs 12 mmt. However, even building reserves needs significant investment. The Government is trying to pull investments from Gulf nations and private players for the project. However, there are some challenges in the way. The crude imported and stored is likely to attract local taxes, which will add to the costs and hence disincentivize private sector participation. This is specially keeping in mind the fact that the Government is likely to hold first right to access these supplies in case of emergencies. We hope that the Government will come up with a solution soon to expedite this development.

That said, such reserves can only provide temporary relief to India's energy issues. What also needs Government's urgent attention is introducing measures that trigger interest of global and domestic players in domestic exploration and production of oil and gas. While a few steps have been taken, a lot remains to be done in this regard. If the Government achieves success on this front in the years to come, it will be a significant megatrend providing a strong fillip to the Indian economy.