Strategic options for upstream companies

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Petroleum Federation of India


Sudipta Das
Advisory Partner & Climate Change & Sustainability Leader (India), EY

Contributed by:

Amrita Ganguly 
Senior professional member, Advisory services, EY

The oil & gas sector is of prime importance to the Indian economy as it constitutes around 15% of India's GDP.1 However, crude also represents the key commodity imported to India and the oil import bill increased by 2 40%to USD140 billion in FY 12. This is contributing to 3 high fiscal deficit which stands at around 5.9%in 2012 and balance of payments deficit at USD 12.8 billion in 4 the last quarter of FY12. Annual fuel subsidies amount to around 110,000 crore annually which come from the Government's budgetary support and some 5 contribution by upstream oil and gas companies.

The country has seen fossil fuel price hikes in recent past at successive and quick intervals, which is one of the factors leading to a high Wholesale Price Index inflation level of 8-9%. India's increased dependency on crude oil is thus a matter of great concern. If India has to maintain its growth story and given the likely oil constrained future, this trend needs to be reversed and a paradigm shift is needed to switch over to more sustainable sources of energy.

Although there has been a significant decrease in the oil intensity of Indian GDP from ~0.5% to~ 0.42% million tonnes oil (eq) per real GDP (in INR billion) between 1995 and 2008, yet a lot needs to be done to reduce the high dependency on imported oil and ensure energy 6 security for the country. In the first place it is important to reduce the subsidies for fossil fuel so that demand is at least partly responsive to price signals. This will create an impact of rising inflation triggering political disturbances all over the country and increasing cost of input materials for industries.

However, in the long run the economy would re-adjust itself in the new normal situation leading to relatively less fossil fuel demand for transportation. Moreover, reduction in subsidies for carbon intensive fuel would also compel other sectors to re-innovate their processes for improved energy efficiency and technologies which run on low carbon fuels and lead to low carbon emissions. For instance, in the transport sector (highest consumer of petroleum products in India~51%) – the auto manufacturers would have to re-design the car engines such that they become compatible for running on low carbon fuels.

This would in a way bring down Greenhouse Gas (GHG) emission intensity of one of the highest GHG emitting sectors in India i.e. transport sector which contributes to around 7% of India's total GHG emissions.7

The upstream oil and gas sector is a major player in the energy value chain, ensuring energy security for the country. These companies have a major role to play in order to secure sustainable sources of energy.

Upstream companies need to follow a strategic approach to ensure secured supply of energy as well as maintain revenue growth. Some of the options that could be explored by them include:

  1. Building a balanced and diversified portfolio of oil and gas assets: Diversification of oil import options would mean importing oil from oil rich yet undiscovered destinations in Africa besides conventional crude exporting countries like Saudi Arabia, Venezuela, Nigeria, Qatar, Iran and other Gulf countries. In fact, since these African countries are in the nascent stage of oil and gas exploration and production, Indian upstream companies can also pick up stakes in their oil/gas fields. This would be a win-win situation since technology and knowledge transfer would immensely benefit the African oil exporter while the Indian upstream companies can ensure security of oil/gas supply. The recent gas discoveries in Mozambique and Tanzania are indicators of the unexplored energy prospects in Africa.

  2. Cost effective import of LNG (combined stake with national/international partner): Probably the best example would be the Joint Venture formed by Reliance Power, Shell and Kakinada Ports to set up a LNG import terminal of annual capacity 5 million tonnes by 2014 on the eastern coast. Upstream companies can form similar consortiums with the relevant port authority and International oil & gas company, who have core competency in building and operating LNG terminals.

  3. Monetization of gas/associated gas produced in remote locations: In many remote parts of India, gas monetization has been dormant due to absence of commercial markets, infrastructure and inter-state and intra-state conflicts. However, an innovative and flexible approach is to be adopted which could include technologies for in-situ gas-to-liquids conversion processes and bringing the liquefied gas to market through cost effective mobile infrastructure.

  4. Value addition to the gas currently flared by converting them into petrochemicals/fertilizers or power: In many oil and gas fields, huge volumes of gas is flared daily. The 'Zero Flare' technology could be adopted and the recovered gas can be sold as raw material for petrochemical/fertilizer plants or transported to be used to generate power using combined cycle gas turbines.

  5. Venturing into unconventional resource exploration such as Coal Bed Methane (CBM) or shale gas: While potential of shale gas is highly debated and range from6.1 to 2,000 trillion cubic 8 feet, however the reserve of CBM in India is well 9 established at 160 trillion cubic foot. Conversely development of both CBM and shale gas assets would require a phased and structured approach, encouraging policy environment and technology partners

  6. Development of gas infrastructure: This would entail de-bottlenecking key projects to enable building up India's natural gas resources as well as setting up extensive pipeline network. An extensive pipeline system would also facilitate transmission and distribution of other forms of gaseous fuel like shale gas and CBM.

  7. Increasing productivity by drilling with improved technology combined with Enhanced Oil/Gas Recovery (EOR/EGR): Typically about 10-20% additional stock tank oil initially in place can be 10 extracted using conventional EOR methods. The Microbial EOR technology, which is yet to be commercialized, is estimated to increase this percentage to 30%. Upstream oil companies should invest more in such R&D activities to commercialize new and innovative technologies. Strategic alliances and partnerships with foreign firms to aid technology and knowledge transfer would enable access to state-of-the-art equipments and other intellectual property.

In strategic investment areas like projects on biofuels, LNG terminals, petrochemicals or power, upstream companies can participate as equity partners and bring separate operating partners who have operating capability and technical competency in these areas.

Typically the oil and gas exploration and production companies are cash rich and have high market capitalization. Significant earnings which these companies make during high oil price regime should be re-invested in such low carbon strategic portfolio to secure a sustainable energy future, The upstream oil and gas industry is a key stakeholder in the energy security and climate change debate, and would play a significant role in promoting clean and sustainable energy use all along the entire oil and gas value chain and even in other sectors like transport and industry.

The dynamic state of business environment and regulatory/policy enablers would force Indian oil &gas upstream companies to develop new business models, adopt strategic approaches and embrace latest technologies which in a way would facilitate the transition of the economy to a low carbon sustainable path.