Petro Economics: - World Oil & Gas Economic
- Enlist the comparison between the growth in production activities of private and public sector companies in India. Which sector is performing better? Give reasons to support your answer.
The following are the major differences between public sector and private sector:
- Public Sector is a part of the country’s economy where the control and maintenance are in the hands of Government. If we talk about Private Sector, it is owned and managed by the private individuals and corporations.
- The aim of the public sector is to serve people, but private sector enterprises are established with the profit motive.
- In the public sector, the government has full control over the organizations. Conversely, Private Sector companies enjoy less government interference.
- The employees of the public sector have the security of the job along with that they are given the benefits of allowances, perquisites, and retirement like gratuity, pension, superannuation fund, etc. which are absent in the case of the private sector.
- In the private sector working environment is quite competitive which is missing in the public sector because they are not established to meet commercial objectives.
- In general Public Sector uses Seniority for promoting employees, however, merit cum seniority is also taken as a base for promoting employees. Unlike Private Sector, where performance is everything, and so merit is considered as a parameter to promote them
Private Sector is progressing faster because promotes quality, not quantity; it encourages talent. Public Sector is full of reservations like reservations for minority section, females, a person with a disability and much more, here nobody sees talent, it is completely ignored and because of this, competent youths remain unemployed.
Public sector enterprises give so many facilities to their employees, which makes them satisfied that their job is secured, due to which, all the people are running after it like it is a marathon. However in the Private Sector, your job is never secured, even if you give years to it, you can be fired anytime just because of a single mistake.
Again in the private sector, where performance is king, the workload is much, but it keeps you active, this is missing in the public sector due to which the work sometimes becomes monotonous which creates boredom. One thing is really good in Private Sector i.e. it is corruption free. In Public Sector, you have to pay lots of money to the government officers even for a simple work, for no reason. It is an unending debate, both are good at their places, if the drawbacks are removed, they will surely prove good for the economy.
- Analyse the deregulation of oil and gas industries and its implications on general public. Categorize it into major metropolitan cities and study the effects.
Deregulation is the process of removing or reducing state regulations typically in the economic sphere. It is the undoing or repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider econ
Deregulation of diesel prices is one of the big decisions taken by the government for the Indian oil & gas industry. It has various benefits for the public as well as private sector petroleum refiners. However, looking at the larger picture, it will also show positive results for the Indian economy as a whole.
Recently, the government fully deregulated diesel prices in India. Earlier, it partially deregulated diesel prices effective from January 18, 2013 by allowing Oil Marketing Companies (OMCs) to raise the retail prices in small amounts periodically until the entire loss is made up, and by decontrolling bulk diesel prices. Petrol prices were already deregulated by the Government since mid-2010.
Now that the prices of two major petroleum products have been fully deregulated, it is likely to benefit OMCs or the public sector petroleum refiners, private refiners, upstream oil and gas public sector companies, and Indian economy as a whole.
How Companies React to Deregulation of Diesel Prices
Public sector petroleum refiners viz. Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), also known as OMCs, have been making huge losses on sale of regulated petroleum products viz. diesel, domestic liquefied petroleum gas (LPG) and PDS kerosene (i.e., kerosene sold through public distribution system) at below-cost prices.
With deregulation of diesel prices, the losses (under-recoveries) are likely to be reduced substantially as it accounted for a significant portion of total under-recoveries (refer to Table 1). Diesel alone contributed to 58.6 per cent, 57.2 per cent and 44.9 per cent of total under-recoveries respectively in 2011–12, 2012–13 and 2013–14. Though OMCs are compensated for their losses by the government and government-run upstream oil and gas companies viz. Oil and Natural Gas Corporation Ltd (ONGC), Oil India Ltd (OIL) and GAIL (India) Limited in the form of subsidy, there is uncertainty in timing and amount of disbursement of subsidy, which adversely affects the finances of OMCs.
Deregulated prices of the two major petroleum products will be beneficial to the Indian economy as a whole.
Deregulated prices of the two major petroleum products will be beneficial to the Indian economy as a whole. (Source: Petroleum Planning and Analysis Cell (PPAC), Ministry of Petroleum & Natural Gas, Government of India)
Thus, after deregulation of diesel prices, their finances are likely to improve significantly. Improved finances can enable them to invest in plant and machinery to increase refinery complexity and, hence, improve their refining margin, which is currently far below the private refiners viz. Reliance Industries Ltd (RIL) and Essar Oil Ltd (EOL). Gross Refining Margin (GRM) of IOCL, BPCL and HPCL for 2013–14 stood at $4.24 per barrel, $4.33 per barrel and $3.43 per barrel respectively-far below that of RIL at $8.1 per barrel and EOL at $7.98 per barrel. Obviously, there is much scope for public sector refiners to improve their GRM.
Benefit to Private Petroleum Refiners
Private refiners RIL and EOL have not been in a position to sell diesel into the domestic retail market because retail diesel prices were regulated and they could not sell diesel at a loss as unlike with public sector refiners, no compensation from the Government was available to them. Hence, they could either export diesel or sell it into the domestic retail market through public sector refiners (OMCs) only. Deregulation of diesel prices provides a level playing field to private refiners who can sell diesel directly into the domestic retail market. With petrol prices already deregulated, they can invest on the necessary infrastructure to expand their network of retail outlets to sell diesel and petrol into domestic retail market without compromising their profitability.
- List down the Refining Capacity Additions during Eleventh Plan. Analyze how it becomes helpful for an economy?
In contrast to the large slippage in oil exploration and production, addition to refining capacity is likely to be 88.42 per cent of the target. Some of the refinery projects like MRPL expansion and Paradip refinery projects have also slipped into the Twelfth Plan due to delays in providing captive power equipment by BHEL to these refineries. Table 14.32 gives the target and achievements of various physical parameters during the Eleventh Plan period.
Since 1947, the Indian economy has been premised on the concept of planning. This has been carried through the Five-Year Plans, developed, executed, and monitored by the Planning Commission (NITI Aayog after 2014). With the Prime Minister as the ex-officio Chairman, the commission has a nominated Deputy Chairman, who holds the rank of a Cabinet Minister. Montek Singh Ahluwalia is the last Deputy Chairman of the Commission (resigned on 26 May 2014). The Eleventh Plan completed its term in March 2012 and the Twelfth Plan is currently underway. Prior to the Fourth Plan, the allocation of state resources was based on schematic patterns rather than a transparent and objective mechanism, which led to the adoption of the Gadgil formula in 1969. Revised versions of the formula have been used since then to determine the allocation of central assistance for state plans. The new government led by Narendra Modi, elected in 2014, has announced the dissolution of the Planning Commission, and its replacement by a think tank called the NITI Aayog (an acronym for National Institution for Transforming India).
Eleventh Plan (2007–2012)
- Rapid and inclusive growth.(Poverty reduction)
- Emphasis on social sector and delivery of service therein.
- Empowerment through education and skill development.
- Reduction of gender inequality.
- Environmental sustainability.
- To increase the growth rate in agriculture,industry and services to 4%,10% and 9% respectively.
- Reduce Total Fertility Rate to 2.1
- Provide clean drinking water for all by 2009.
- Increase agriculture growth to 4%
Policy Initiatives during the Eleventh Plan
Various policy initiatives were taken to address the issues relating to attaining hydrocarbon energy security. Major policy initiatives taken by the Government during the Eleventh Plan are as follows.
The Government has set up Petroleum and Natural Gas Regulatory Board with effect from 1
October 2007 to regulate downstream activities of oil and gas sector under the PNGRB Act, 2006.
However, the mandate of PNGRB is fairly narrow and deals largely with pipelines. PNGRB is currently empowered to give authorisation to entities for laying, building, operating and expanding any pipeline as common or contract carrier and expanding city gas distribution projects.
Allocation of Natural Gas
Natural gas produced from NELP blocks is subject to Government-prescribed allocation to different uses and also Government approval of the pricing formula. The Government has prioritised allocation of gas produced from NELP blocks in the following order:
- Fertiliser plants producing subsidised fertilisers
- LPG plants
- Power plants
- City Gas Distribution (CGD) for CNG and domestic PNG
- Steel, petrochemicals, refinery, captive power plants and CGD for industrial and commercial customers An Empowered Group of Ministers has allocated 93.336 MMSCMD of gas on a combination of firm and fall back basis from the blocks producing gas under NELP.
Strategic Storage of Crude Oil
The Government is in the process of creating strategic crude oil storage capacity for 15 days at Vishakhapatnam (1.33 million tonnes), Mangalore (1.50 million tonnes) and Padur (2.5 million tonnes) through a Special Purpose Vehicle, namely, Indian Strategic Petroleum Reserve Ltd. (ISPRL). The storage would be further upgraded at other suitable locations by an incremental capacity of 12.5 million tonnes during the Twelfth Plan period.
A programme of 5 per cent blending of ethanol with petrol is already underway with effect
from November 2006 targeting 20 States and 4 UTs. Subject to availability, the percentage of blend can be enhanced to 10 per cent as specification for petrol with 10 per cent ethanol blend is already given by the BIS. At present, the EBP Programme is successfully running in 14 States and three UTs; OMCs have been able to contract 55.87 crore litres of ethanol against the requirement of 105 crore litres of ethanol for 5 per cent blending in the entire notified area.
- Analyze the growth trends of LPG Marketing in India. How far it has been advanced?
Liquefied petroleum gas (LPG) is a mixture of propane and butane which finds applications in multiple end user segments. The residential and commercial segment occupied the maximum market share for LPG consumption in 2013. This segment accounted for over 60% of the global LPG consumption in 2013, and is primarily used as a cooking fuel. Other applications in the residential segment include LPG for heating and lighting. Both rural and urban populations are highly dependent on LPG as a cooking fuel. Countries in Latin America and the Asia-Pacific with large semi urban and rural populations are the major markets for LPG consumption. Africa is also an attractive market for LPG, where over 90% of the consumption is by the residential segment.
One of the fastest growing end user segments of LPG is Autogas. LPG used as a transportation fuel is commonly referred to as Autogas. Autogas is finding increasing adoption globally and especially in Europe. Countries such as Turkey, Poland and Germany have been aggressively adding to their Autogas fleet in the recent past. Japan and South Korea in the Asia-Pacific are also major adopters of Autogas. These countries have begun converting their entire taxi and rental car fleets to Autogas in an effort to switch over to cleaner fuels. Adoption of Autogas is likely to continue at attractive rates in the future, and this segment is likely to exhibit the fastest growth rate in consumption of LPG in the future. LPG consumed by the Autogas segment is likely to grow at a CAGR of 5.2% from 2014 to 2020.
There is likely to be an increased consumption of LPG from the midstream sector within the forecast period as well. LPG can be used as a feedstock in petrochemical and refinery complexes and is generally a substitute to naphtha. There are a large number of petrochemical complexes planned in China and the Middle East which are likely to consume LPG as the preferred feedstock. The growth in LPG consumption by the midstream sector is likely to be significantly high in the Middle East. In the U.S., where shale gas production has put a downward pressure on LPG prices, a preference towards using LPG in petrochemical complexes can also be observed. Large refinery capacity additions planned in Russia and certain countries of the Asia-Pacific are also likely to increase consumption of LPG as a refinery feedstock.
The three primary source segments of LPG are refineries, non-associated gas, and associated gas. LPG produced through crude oil refining accounted for nearly 41% of the global LPG production in 2013. The non-associated gas category is likely to contribute to the maximum LPG production within the forecast period. High LPG production volumes can be expected from the Middle East which is currently the largest producer of LPG globally. However, a large volume of LPG produced is likely to be captively consumed by large petrochemical complexes coming up in the region. The U.S. emerged as a net exporter of LPG in 2012 as an aftermath of the shale gas boom in the country. LPG production is likely to increase at attractive rates in this region in the future. A majority of the surplus LPG production from the U.S. is likely to be routed to Latin American countries where there is an increasing demand for LPG from the domestic and commercial sector.
The Panama Canal expansion which is likely to be complete by the end of 2016 is likely to change global LPG trade patterns. The expansion will allow the largest gas carriers to pass through the canal which is likely to make exports from North America competitive with those from the Middle East. The Asia-Pacific region is likely to be benefitted from this expansion as it will open up trade routes for cheap LPG imports from the U.S. to reach its shores. With China gearing up for a shale gas revolution by the end of 2016, an increased production of LPG can be expected in Asia-Pacific’s domestic market as well. Overall the price of LPG in Asia-Pacific is likely to show a decline in the future owing to these factors. Countries with a surplus of natural gas and a developed distribution pipeline infrastructure are likely to opt for natural gas instead of LPG in the future. However this substitution threat is minimal globally except for a few geographies.
- Analyse the trends towards growth in refining capacity of crude oil in the world. Evaluate its exploration and development stages.
- Crude oil benchmarks were locked in a narrow range during Octoberas continuing oversupply in world markets and a strong US dollar limited the impact of strikes in Brazil and geopolitical tensions. At the time of writing, ICE Brent was trading at $44.43/bbl and NYMEX WTI at $41.75/bbl.
- Global demand growth is forecast to slow to 1.2 mb/d in 2016 after surging to a five-year high of 1.8 mb/d in 2015.Momentum eases towards its long-term trend as recent props - sharply lower oil prices, colder-than-year earlier winter weather and post-recessionary bounces in some countries - are likely to give way.
- Global oil supplies breached 97 mb/d in October, as non-OPEC output recovered from lower levels the previous month.Despite the resilience of producers such as Russia, non-OPEC supply is forecast to contract by more than 0.6 mb/d next year. US light tight oil (LTO), the driver of non-OPEC growth, is expected to decline by 0.6 mb/d in 2016.
- OPEC crude supply held steady in October at 31.76 mb/d with declines in Iraq and Kuwaitoffset by higher supply from Libya, Saudi Arabia and Nigeria. A slight tightening in fundamentals lifts the 2016 ´call´ on OPEC by 0.2 mb/d from last month´sReport to 31.3 mb/d.
- OECD commercial inventories rose counter-seasonally by 13.8 mb to stand at a record near 3 billion barrels by end-September.The pace of global stockbuilding slowed during the third quarter to 1.6 mb/d from 2.3 mb/d in 2Q15, but remained significantly above the historical average.
- Global refinery runs sank by 1.2 mb/d in October to 78.2 mb/dwith seasonal maintenance in full swing, leading to a significant reduction in annual throughput growth. Margins edged lower in October versus September but remained robust despite high product stocks.
3 Billion Barrel Cushion
Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil. Demand growth has risen to a five-year high of nearly 2 mb/d, with India galloping to its fastest pace in more than a decade. But gains in demand have been outpaced by vigorous production from OPEC and resilient non-OPEC supply - with Russian output at a post-Soviet record and likely to remain robust in 2016 as well. The net result is brimming crude oil stocks that offer an unprecedented buffer against geopolitical shocks or unexpected supply disruptions.
The stock overhang that first developed in the US on the back of soaring North American crude production, has now spread across the OECD. Since the second quarter, inventories in Asia Oceania have swollen by more than 20 million barrels. In Europe, record high Russian output and rising deliveries from major Middle East exporters are filling the tanks. Crude oil stocks are also piling up in the non-OECD, with China building inventories at a 0.7 mb/d clip during the third quarter and India starting to pour oil into its strategic reserves. This surplus crude provides some relief, with OPEC´s spare production buffer stretched thin as Saudi Arabia - which holds the lion´s share of excess capacity - and its Gulf neighbours pump at near record rates
The shock absorber provided by oil stocks is no longer restricted to just crude. As refineries ran flat out to meet soaring demand for gasoline in top consumers the United States and China, distillate inventories ballooned as a consequence. This is not only due to seasonal factors: lower oil prices are also having an uneven influence on consumers. While motorists are responding relatively quickly to cheaper gasoline by purchasing bigger cars and taking to the roads, middle distillate demand growth has failed to match the heights seen in gasoline as industrial activity in many countries wavers.
Moreover, world demand growth is forecast to ease closer to a long-term trend of 1.2 mb/d in 2016 as supportive factors that have recently fuelled consumption are expected to fade. The impact of oil´s steep price plunge on end users is unlikely to be repeated and economic conditions are forecast to remain problematic in countries such as China.
As winter approaches, stocks of diesel - the heating fuel of choice for Europe and the US Northeast - are now brimming. Between February and August, OECD middle distillate stocks surged by over 84 mb. By end-August they stood close to 600 mb, their highest absolute level since 2010. By end-September they remained a comfortable 36 mb above average and 49 mb above a year ago.
This could protect the market from a supply crunch should there be a lengthy spell of cold temperatures. But the current forecast is for a mild winter in Europe and the US. If it turns out to be true, bulging stock levels will add further pressure and oil market bears may choose not to hibernate.
- Research the key initiatives taken by the Government of India to promote the trading of oil and natural gas in the global market. How far it stands successful?
The oil and gas sector is one of the six core industries in India. It is of strategic importance and plays a pivotal role in influencing decisions across other important spheres of the economy.
In 1997–98, the New Exploration Licensing Policy (NELP) was envisioned to deal with the ever-growing gap between demand and supply of gas in India. As per a recent report, the oil and gas industry in India is anticipated to be worth US$ 139,814.7 million by 2015. With India’s economic growth closely linked to energy demand, the need for oil and gas is projected to grow further, rendering the sector a fertile ground for investment.
To cater to the increasing demand, the Government of India has adopted several policies, including allowing 100 per cent foreign direct investment (FDI) in many segments of the sector, such as natural gas, petroleum products, and refineries, among others. The government’s participation has made the oil and gas sector in the country a better target of investment. Today, it attracts both domestic and foreign investment, as attested by the presence of Reliance Industries Ltd (RIL) and Cairn India.
Backed by new oil fields, domestic oil output is anticipated to grow to 1 MBPD by FY16. 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 CAGR of 21 per cent during FY08–17.
Domestic production accounts for more than three-quarters of the country’s total gas consumption.
India increasingly relies on imported LNG; the country was the fifth-largest LNG importer in 2013, accounting for 5.5 per cent of global imports. India’s LNG imports are forecasted to increase at a CAGR of 33 per cent during 2012–17.
State-owned ONGC dominates the upstream segment (exploration and production), accounting for approximately 60 per cent of the country’s total oil output (FY13).
IOCL operates 11,214 km network of crude, gas and product pipelines, with a capacity of 1.6 MBPD of oil and 10 million metric standard cubic metre per day (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.
According to data released by the Department of Industrial Policy and Promotion (DIPP), the petroleum and natural gas sector attracted foreign direct investment (FDI) worth US$ 6,519.53 million between April 2000 and January 2015.
Following are some of the major investments and developments in the oil and gas sector:
- Kirloskar Oil Engines Ltd (KOEL) and MTU Friedrichshafen, GmbH have signed a memorandum of understanding (MoU). The MoU lays down exclusive cooperation on the building and commissioning of emergency diesel gensets (EDG).
- CDP Bharat Forge GmbH has acquired 100 per cent equity shares of Mécanique Générale Langroise (MGL) for € 11.8 million (US$ 12.91 million). The acquisition would consolidate Bharat Forge’s position in the oil and gas sector by enhancing service offerings and geographical reach.
- Technip has won a € 100 million (US$ 109.37 million) contract from Oil and Natural Gas Corporation (ONGC) to build an onshore oil and gas terminal in Andhra Pradesh.
- Essar Oil Ltd has signed a deal with Russia-based OAO Rosneft to import 10 million tonnes (MT) of crude oil per year for 10 years.
- The oil marketing companies have reduced the price of non-subsidised liquefied petroleum cooking gas (LPG) by Rs 43.5 (US$ 0.69) per cylinder. The companies have also reduced jet fuel rates by 12.5 per cent, the sixth straight reduction in prices since August 2014.
- Reliance Industries Ltd (RIL) and Mexican state-owned company Petroleos Mexicanos (Pemex) have entered into a memorandum of understanding (MoU) for cooperation in the oil and gas sector.
- GAIL Global USA LNG LLC (GGULL) has signed an agreement with the US-based WGL Midstream Inc for sourcing gas required to produce 2.5 MT of liquefied natural gas (LNG) a year at the Cove Point Terminal in Maryland, US.
Two landmark initiatives for energy efficiency – Design Guidelines for Energy Efficient Multi-Storey Residential Buildings and Star Ratings for Diesel Gensets and for Hospital Buildings – were launched by Mr Dharmendra Pradhan, Minister of State with Independent Charge for Petroleum and Natural Gas, Government of India.
Some of the major initiatives taken by the Government of India to promote oil and gas sector are:
- India and Norway have discussed bilateral relationship between the two countries in the field of oil and natural gas and decided to extend cooperation in hydrocarbon exploration.
- To strengthen the country`s energy security, oil diplomacy initiatives have been intensified through meaningful engagements with hydrocarbon rich countries.
- 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.
- 24 x 7 LPG service via web launched to provide LPG consumers an integrated solution to carry out all services at one place, through MyLPG.in, from the comfort of their home.
- Special dispensation for North East Region: For incentivising exploration and production in North East Region, 40 per cent subsidy on gas price has been extended to private companies operating in the region, along with ONGC and OIL.
- The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister Mr Narendra Modi, has approved a mechanism for procurement of Ethanol by Public Sector Oil Marketing Companies (OMCs) to carry out the Ethanol Blended Petrol (EBP) Program
- Critically examine the issue for payment of outstanding oil debt between India and Iran. How it has been resolved? What steps have been undertaken?
India´s ties with Iran need urgent attention as an unresolved row over oil payments threatens to drag the relationship, once described as “strategic,” to a new low.
The problem arose in December 2010 when the Reserve Bank of India, under U.S. pressure, decided to no longer use a clearing mechanism to pay Iran for its crude. Washington and its western allies had exhorted India not to use the Asian Clearing Union (ACU) currency swap system to pay Iran. They argued that this mechanism, established at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP) and in operation since 1974, was disconcertingly opaque. Consequently, it was difficult to ascertain whether the money flowing into Iran´s coffers was not used to fortify the country´s nuclear programme. Faced with these objections, India, according to the Financial Times, began using the German bank, EIH, for making payments. However, this channel broke down in May 2011, after the European Union imposed sanctions on Iran.
Iran is India´s core energy partner — its second largest oil supplier. Nearly 12 per cent of India´s total demand, around 4,00,000 barrels a day, feeds India´s refineries and petrochemical complexes. The Mangalore Refinery and Petrochemicals Ltd (MPCL) is the largest oil importer from Iran. The IOC, BPCL, HPCL and Essar are also major consumers of Iranian crude.
Because of the difficulties over payments, Indian companies have accumulated a debt of nearly $5 billion. With the payment row festering, Iran decided to halt supplies to Indian firms for August. However, as the deadline for the payments neared, both sides scrambled to achieve a breakthrough. On July 31, Iran´s Oil Ministry website SHANA reported that the payment row had been settled. India would pay part of the debt “promptly” and the rest would be “gradually settled.” The Ministry´s optimism notwithstanding, details of the inner workings of the new mechanism and the prospects of its durability remain far from clear. (Media reports say that India and Iran have finalised the settlement of dues through a Turkish bank arrangement.)
The possible collapse of Iranian supplies will have far greater ramifications than a mere commercial impediment in a buyer-seller relationship. Iran´s decision not to supply oil, if implemented, will deliver a serious blow to the evolution of a robust geostrategic relationship between New Delhi and Tehran, of which a highly developed energy partnership has to be the core. Aware of the importance of establishing a strong political relationship, India and Iran, with Pakistan as the third party, had begun negotiations on the Iran-Pakistan-India (IPI) pipeline. Had the pipeline materialised, it would have not only generated obvious economic benefits but also imparted regional stability, premised on mutually beneficial interdependence.
Despite the unrealised potential of the IPI or any of its variants, Iranian officials privately concede that the energy relationship between India and Iran should move on. Before threatening to stop supplies, Iran had begun to show fresh interest in seeking Indian investments in its oil and gas sector. Alive to the recent Indian energy forays in neighbouring Central Asia, Iranians were also considering working with India on a possible fuel swap arrangement in the future. Under this mechanism, Iran could export energy to India from its terminals, in return for an equal amount of oil delivered across the border to Iran, which may have been tapped by Indian firms in Central Asia.
Quite recently, India´s induction into the United Nations Security Council as a non-permanent member appeared to have led Tehran, to consider afresh, the need for reinforcing its ties with New Delhi. “We realise that India in the future is likely to play an ever-larger global role, and we want to position ourselves well as this process unfolds,” an Iranian academic in Tehran, who did not wish to be named, recently told this correspondent.
Apart from energy, there are two key elements that define the relationship. One of them is trans-continental transit. Iran´s port of Bandar Abbas is the starting point of the north-south corridor which can ferry goods northwards towards the Caspian, and further into Russia and Europe. But, more critically, India needs Iran to physically access Afghanistan. It can do so from the Iranian port of Chabahar, from where a land corridor extends northwards before entering Afghanistan. For reasons of geography, Iran is central to India´s Afghan policy.
The importance of Iran to fulfil India´s aspirations in Afghanistan is bound to heighten as NATO, most likely without imparting much stability, begins to pull out of the country, in accordance with a three-year time table. In a likely political vacuum, there will be demands on India, Iran, its Central Asian neighbourhood and possibly Russia to play a proactive role in Afghanistan. That would, however, require a powerful vision and strategic cooperation, including intelligence sharing and political coordination at an unprecedented level, for which serious preparations have to begin right away. In fact, with western forces stepping out, in a manner not very different from the Soviet withdrawal from the country in 1989, India may find it necessary to initiate the evolution of a regional mechanism, where neither Pakistan nor China is left out, so that Afghanistan — a country prone to multiple influences — has a realistic chance to rebuild.
However, the manner in which the oil payments row is being handled suggests that New Delhi, far from strengthening ties with Tehran from a larger regional perspective, might have, after considerable deliberations and probably in line with the thinking in Washington, decided to scale down its ties with Iran. Alternatively, India-Iran ties, of which Afghanistan is a key component, might have become the victim of governmental drift, reflecting complete liberation from a larger strategic vision that should otherwise inform a vibrant relationship between the two countries.
It is, therefore, disappointing that India, instead of quickly arriving at a new payment agreement with Iran and defusing a major crisis, has apparently decided to place heavier reliance on Saudi Arabia as an alternative fuel supplier.
Reuters has quoted K. Murali, HPCL´s head of refineries and international trade, as saying that the company has sought an additional supply of one million barrels in August from Saudi Aramco.
India´s greater reliance on Saudi Arabia may not be temporary, confined to warding off its current difficulties with Iran. Indian refiners may already be restructuring their procurements by probing alternative suppliers, especially Saudi Arabia and its Gulf allies, to offset their dependence on Iran. In its annual report, MRPL has noted that given “the enhanced level of sanctions on Iran in future, [and] the non-resolution of the current payment crisis, the availability of Iranian crude may be difficult.”
As Indian firms appear to line up behind Saudi Arabia and its Arab Gulf partners, their moves are likely to invite Iran´s hostility, which could easily spill over into the political realm. The decision to increase dependence on Saudi Arabia and reduce procurements from Iran is particularly ill-timed because of the rapid escalation recently of a Cold War between the two countries. Since the advent of the Arab Spring — the expression for the rising tide of pro-democracy movements since January that are sweeping across West Asia and North Africa — relations between Riyadh and Tehran have turned nasty. Saudi Arabia´s decision in March to send troops into neighbouring Bahrain to quell, what was described by Riyadh as a pro-Iran Shia uprising, has added a sharp emotive edge to the Saudi-Iran rivalry. Iran´s foes have also accused Tehran of fomenting the rise of the so-called “Shia crescent” in the region — a mythical Iran-led Shia alliance that allegedly is trying to foist a sectarian anti-Sunni agenda in the region.
By siding with the Arab petro-monarchies to meet its energy requirements, India has, inadvertently or otherwise, forced itself into the throes of the Saudi-Iran Cold War. For many influential Iranians, India´s move would be seen as taking sides — a deliberate decision to join the anti-Iran camp led by the United States and its regional allies, chiefly Saudi Arabia. In highly politicised Iran, which is particularly on edge after the onset of the Arab Spring, this is combustible material, which can rapidly inflame public passions against India and eventually lead to the undermining of New Delhi´s core interests in Afghanistan, compulsorily channelled through Iran.
Amid the fluidity of the Arab Spring and its accompanying firmament, India needs to navigate skilfully to establish parallel and independent relations with both Saudi Arabia, the world´s largest oil producer, and Iran, its strategic partner, for the protection of its interests in Afghanistan and, later, in energy-rich Iraq, where Tehran´s influence runs deep. But a balanced and vibrant relationship with the two regional giants will become possible only if India assesses its difficulties with Iran not as an isolated technical issue but as one which can define the contours of its influence in the region.
- Assess the difference in customs duty applicable for crude and on refined products. Examine the gap in between them. How this mitigation be removed?
With international oil prices slumping to 12-year low, the government may look at reimposing 5 per cent customs duty on crude oil imports to shore up revenue by close to Rs 18,000 crore.
The government had cut customs duty on crude oil imports to zero from 5 per cent in June 2011 when rates zoomed to over $100 per barrel. But with oil prices hovering at $30 a barrel now, the duty may be back, official sources said.
As the government looks to shore up its revenue without hurting economic growth, reimposing import duty on crude oil presents a viable alternative the Budget 2016-17 to be presented on February 29, the sources said.
Alongside, customs duty on petroleum products, petrol and diesel may also be increased in equal proportion to duty levied on domestic refiners.
Petrol and diesel currently attract 2.5 per cent import duty. This duty differential is maintained so as to protect domestic industry by making import of product costlier as compared to domestic manufacturing.
If import duty on crude oil is raised in the budget for 2016-17, it would go up on allied products too from 2.5 per cent to 7.5 per cent, sources said.
At $30 per barrel crude oil price, 5 per cent customs duty will fetch the government close to Rs 18,000 crore at current levels of imports.
India imported 189.4 million tons of crude oil in 2014-15 and after excluding 29 million tons of import for SEZ refinery, the dutiable imports are about 161 million tons. Raw material import by SEZ units are exempt from import duty.
Sources said this mop up may help offset the loss of revenue the government may face because of likely cut in cess on domestic crude oil.
The Budget may announce an ad valorem rate of cess instead of Rs 4,500 per tonne fixed levy currently.
The ad valorem rate of cess will results in higher payouts when prices are high and lower when rates fall.
Currently, state-owned Oil and Natural Gas Corp (ONGC) and Oil India LtdBSE 0.92 % (OIL) pay a cess of Rs 4,500 per tonne on crude oil they produce from their allotted fields on a nomination basis. Cairn has to pay the same cess for oil from the Rajasthan block.
With oil prices dropping to 12-year low of under $30 per barrel, the cess translates into one-third of the realisation going away in just one levy.
The Budget may fix the levy at around 8-9 per cent of the crude oil price to provide relief to domestic producers, sources said.
The first step should be to eliminate rate dispersion by bringing down the duties on petro products. When the customs duty on crude oil and petroleum products is equal, then this anomalous profitability of Indian refineries would be removed.
Duties on oil and petro products still involves penalising Indian consumers owing to the presence of tariffs. Hence, for the consumer, the best thing is zero customs duties. In this case, Indian refineries would have to compete with international refineries. Refineries in India are already major exporters of petro products. This shows that they already have the engineering capability to compete with the best refineries of the world. However, if after decades of protection, refineries in India are still not efficient, there is no reason why consumers should bear the burden of their inefficiency.
Drilling Concerns of Alaska´s Arctic National Wildlife Refuge (ANWR)
The dramatic fluctuations in crude oil prices over the past two years have sparked renewed interest in U.S. oil exploration and development. Some politicians and commentators argue that an increase in exploration could have a marked impact on oil prices. Others say the price impact would be small.
The policy debate currently focuses on allowing drilling in a small part of Alaska´s Arctic National Wildlife Refuge (ANWR). Drilling has been banned in ANWR due to various environmental concerns.
The ANWR is a national wildlife refuge in north-eastern Alaska, United States. It consists of 19,286,722 acres (78,050.59 km2) in the Alaska North Slope region. The coastal plain in the ANWR (often referred to as the "1002" area) is jointly owned by the federal government, the State of Alaska and Native American corporations (Energy Information Administration (EIA), 2008a). This region is thought to contain a relatively large amount of oil that would be relatively cheap to develop. Environmentalists and others have opposed drilling in this area because it is a pristine (but inhabited) area that they believe is ecologically unique. In particular, they are concerned that a spill or pipeline leak would endanger a key wildlife habitat.
History The Trans-Alaska pipeline system got virtually completed in 1977. The Alaska National Interest Lands Conservation Act, signed by President Jimmy Carter in December 1980, created more than 104,000,000 acres (420,000 km2) of national parks and wilderness areas from federal holdings in that state and also allowed drilling in ANWR but not without prior approval from Congress. Section 1002 of the act allowed the evaluation of potential petroleum reserves in the 1002 area from surface geological studies and seismic exploration surveys. However, no exploratory drilling was allowed.
In November 1986, a draft report by the United States Fish and Wildlife Service recommended that oil and gas development be allowed in all of the “1002 Area” of ANWR. The report argued that the oil and gas potentials of the coastal plain were needed for the country´s economy and national security. Conservatives, however, expressed concerns that oil operations would harm the ecological systems that support wildlife.
No major developments took place within the next decade. In 1996 the Republican-majority House and Senate voted in favour of allowing drilling in ANWR, but this legislation was vetoed and turned down by President Bill Clinton.
In 2000, President George W. Bush pushed to perform exploratory drilling for crude oil and natural gas in and around the refuge after the USGS estimation of reserves in 1997. The House of Representatives voted in mid-2000 to allow drilling. In April 2002 the Senate rejected it.
On June 18, 2008 President George W. Bush forced Congress to reverse the ban on offshore drilling in the ANWR in addition to approving the extraction of oil from shale on federal lands. President Bush cited the growing energy crisis as a major factor for reversing the presidential executive order issued by President George H. W. Bush in 1990, which banned coastal oil exploration and oil and gas leasing on most of the outer continental shelf.
Estimated Oil Reserves
Technically recoverable oil within the ANWR 1002 area (excluding State and Native areas), as estimated but the United States Geological Survey in 1998, lies between 4.3 and 11.8 billion barrel of oil (BBO) (95% and 5% certainties respectively), with a mean value of 7.7 BBO.
As estimated by USGS, this quantity of technically recoverable oil is not distributed uniformly. The un-deformed area is estimated to contain between 3.4 and 10.2 BBO (95% and 5% certainties respectively), with a mean of 6.4 BBO. The deformed is estimated to contain between 0 and 3.2 BBO (95% and 5% certainties respectively), with a mean of 1.2 BBO. The oil is expected to occur in a number of accumulations rather than a single large accumulation.
Commercial viability of a discovery depends on factors like oil price, accumulation size, recovery technology, and proximity to existing infrastructure (pipelines, markets etc.).
Economic analysis of oil reserves of the “1002 area” includes the costs of finding, developing, producing, and transporting oil to market (lower 48 West Coast) based on a 12 percent after-tax return on investment, all calculated in constant 1996 dollars. Estimates of economically recoverable oil, expressed by probability curves, shows a directly proportionate relation between quantity of oil and its price. It was found that at a market price of $24/barrel, there is a 95% probability of at least 2.0 BB of economically recoverable oil and a 5% probability of at least 9.4 BB with a mean or expected value of 5.2 BB. At prices less than $13/barrel, no commercial oil is estimated, but at a price of $30/barrel, between 3 and 10.4 BB are estimated.
It is interesting to note that the best estimate of 7.7 BBO in ANWR is very close to domestic consumption in 2005 in the U.S. But still the recovery of the first barrel of crude oil would take many years. In 2025, it is forecasted that 0.9 million barrels of oil per day (MBD) would be recovered and the domestic production is forecasted to be 4.6 MBD (EIA 2004). Thus, at its high, ANWR is forecasted to account for 20% of domestic production. Finally, total supply in 2025, including imports, is forecasted to be 28.3 MBD, so ANWR at its peak is predicted to account for approximately 3.2 percent of domestic oil consumption.
Benefits of Drillin According to Hahn and Passell (2010), net benefits are estimated for a price scenario of $50/barrel. It is estimated that at $50/barrel, 7 billion barrels are economically recoverable. The benefits include the revenue generated, price-reduction benefit and the reduced-disruption-cost benefit.
The per barrel price-reduction benefit is generated by reduced world demand for imported oil. It is calculated as the reduction in the import bill divided by the decline in the number of barrels of oil imported by the U.S. Leiby (2007) estimated it to be $10/barrel. The reduced-disruption-cost associated with reducing oil imports is estimated to be $5/barrel.
These values are applied to the net decrease in total U.S. imports, which is equal to the increase in U.S. oil production less the increase in U.S. oil consumption caused by the lower price.
7 categories of costs are considered. These are:
- Direct costs that producers incur in extracting the oil and bringing it to the market. Estimated average direct costs: $19/barrel.
- Cost of not being able to use the affected resource for other purposes if drilling occurred or „Use Value?. Kotchen and Burger (2007) estimate it to be 0/barrel.
- Cost of valuing a resource but never intending to use it or „Non-use Value?. It is estimated roughly to be $11 billion (Carson et al. 2003).
- Global air pollution or greenhouse gas damage. It is assigned a value 0 as share of ANWR drillings to the global air pollution is negligible.
- Local air pollution. It is estimated to be $22 billion (Parry 2005).
- Traffic congestion. It is estimated to be $18 billion (Parry 2005).
- Traffic accidents. It is estimated to be $23 billion (Parry 2005).
Thus, Total Benefit= $455 billion.
Total Costs= $203 billion.
Net Benefit= $252 billion.
Under the current tax policy, this would generate social benefits as industry rents of $90 billion, state of Alaska tax revenues of $36 billion, and federal tax revenues of $125 billion.
Challenges to Drilling
Drilling in ANWR would lead to several environmental concerns. Potential adverse effects on the environment would result from two principal sources: transportation as part of seismic analyses, and infrastructure for extracting and transporting oil. The US Fish and Wildlife Service (2001) reports that drilling in ANWR will have “major effects” on Porcupine caribou herd and musk oxen as well as “moderate effects” on wolves, polar bears, seabirds and coastal fish. Aside from direct effects on animal populations, oil spills are a serious concern.
Finally, another environmental concern that is usually debated is that ANWR oil will promote air-pollution and greenhouse-gas emissions. The argument is that oil consumption will increase, causing increased emissions with adverse effects on environmental quality, human health, and climate change.
To allow drilling in ANWR, the most common technique is contingent valuation, which asks people willingness to pay (WTP) or willingness to accept (WTA) for a proposed policy or change in environmental quality. While it is natural to think about economic value in terms of WTP, the conceptually correct measure for the question of drilling in ANWR is WTA.
In order to calculate the minimum amount that the individuals will be willing to accept to allow drilling, i.e. breakeven WTA, the relevant population of the US aged 18 or older in 2005 is considered, which the US Census estimates as 220,377,406 people. Dividing our best estimate of the oil benefits as calculated above, $252 billion, by this population yields an average WTA of $1,141/person. These estimates represent a one-time payment. We can, however, pay this WTA annually for 30 years, which is the duration over which ANWR oil is expected to flow. This would yield a present value WTA of $38 per year.
With the best estimate we can make the following statement: If the average WTA for a onetime payment to permit drilling and development in ANWR is $1,141 (or $38 per year for 30 years), then the social costs will exactly equal the estimated benefits. If the true WTA falls short of this estimate, then economic efficiency recommends drilling. Alternatively, if the true WTA exceeds the estimate, then economic efficiency does not recommend drilling. The question, then, is whether the estimate falls within the reasonable expectation of what US citizens would be willing to accept in order to allow drilling in ANWR.
- Present your views on whether drilling be allowed or not in the ANWR elaborately.
In my views drilling should not be allowed in ANWR.
On the northern edge of our continent, stretching from the peaks of the Brooks Range across a vast expanse of tundra to the Beaufort Sea, lies Alaska´s Arctic National Wildlife Refuge. An American Serengeti, the Arctic Refuge continues to pulse with million-year-old ecological rhythms. It is the greatest living reminder that conserving nature in its wild state is a core American value.
In affirmation of that value, Congress and the American people have consistently made clear their desire to protect this treasure and rejected claims that drilling for oil in the Arctic Refuge is any sort of answer to the nation´s dependence on foreign oil. Twice in 2005, Congress acted explicitly to defend the refuge from the Bush administration and pro-drilling forces, with House leaders removing provisions that would have allowed for drilling from a massive budget bill, and the Senate withstanding an attempt by Republican leaders to open up the Arctic.
Since then, concerned Americans have continued to push Congress to thwart recurring efforts to see the refuge spoiled. During President Obama´s 2008 campaign he pledged not to open the coastal plain of the Arctic National Wildlife Refuge to oil and gas leasing. Over the last year the Fish and Wildlife Service has been developing a new management plan for the Refuge and is considering recommending Wilderness for the coastal plain
- Illuminate various environmental concerns due to which drilling has been banned in ANWR.
Scientists and politicians disagree on how much effect any new drilling might have on prices at the pump. Further, they argue about potential impacts on the ecosystem.
Impact on marine life
Concerns over new drilling amount to more than just a worry about spills.
To find potential oil reserves, researchers send seismic waves into the ground. The waves bounce back to reveal the buried topography and can hint at a possible reserve. But seismic noise disorientates whales and leads to mass beaching’s, said Richard Charter, a government relations consultant for the Defenders of Wildlife Action Fund.
Laboratory experiments attempting to pin down the impact of seismic waves on wildlife often must rely on caged animals, which raises questions about whether the animals would have fled and avoided ear damage if they could have, note Robert McCauley and colleagues in The Journal of the Acoustical Society of America.
However, Andy Radford, a policy advisor at the American Petroleum Institute, isn’t worried. "[We] make sure there are no whales in the area when we are doing our seismic search," Radford said.
Questions on land too
There are also questions about the impacts on land.
Radford described advances that reduce oil drilling’s environmental footprint. For instance, oil companies are now able to drain several oil fields from one platform. And new horizontal drilling techniques allow more oil to be extracted from a single well.
Major infrastructure – such as roads, jet landing strips, repair shops, homes and industrial complexes – is, of course, still necessary and could disturb wildlife that is accustomed to pristine land, said Charles Clusen, director of National Parks and Alaska Projects for the Natural Resources Defense Council.
Similar concerns about wildlife arose before construction of the Alaskan Pipeline, built in the 1970s.
However, any development of the