8/2/2019 vvim-

1/4

One, our import bill for 2011-12 has shot up to $475 billion. Of

this, nearly a third, or $150 billion, comprises crude oil imports.

Two, the trade deficit has bloated to $175 billion. Oil imports now

comprise a gargantuan 85% of the country's total trade deficit.

India's crude oil production rose barely 1% in 2011-12 over the previous

year to 7,63,000 barrels per day. Meanwhile, India's energy needs are

exploding. The mismatch between domestic crude production and

imports has had three disastrous consequences.

One, our import bill for 2011-12 has shot up to $475 billion. Of this,

nearly a third, or $150 billion, comprises crude oil imports. Two, the

trade deficit has bloated to $175 billion. Oil imports now comprise a

gargantuan 85% of the country's total trade deficit.

Three, for the first time since theLehmancrisis in September 2008,

India's balance of payments in 2011-12 has turned negative. This isdespite robust FII inflows: a record $9.50 billion-plus in the January-

March 2012 quarter, the highest since 1993 when FIIs were allowed to

invest in the Indian stock market.

The minister for petroleum and natural gas, S Jaipal Reddy, who took

charge in January 2011, has a lot of policy debris of the past to clear up.

India's domestic oil production slowed on the watch of Murli Deorawho held the portfolio between 2006 and 2011. Reddy has begun

shaking up the old order. Domestic crude production is slated to rise by

11% in 2012-13 and a further 8% in 2013-14 to reach just under one

million barrels per day (bbd).

http://economictimes.indiatimes.com/topic/Lehmanhttp://economictimes.indiatimes.com/topic/Lehmanhttp://economictimes.indiatimes.com/topic/Lehmanhttp://economictimes.indiatimes.com/topic/Lehman

8/2/2019 vvim-

2/4

India's total crude oil requirement in 2013-14 is expected to rise to well

over four million bbd. Crude imports, however, should fall from the

current level of 80% of total consumption to 75% if new oilfieldsprospected by Cairn and ONGC deliver on their promise by 2014.

The long-term target must be to bring the ratio of imported crude to

total consumption down to the historical level, last seen in the 1980s

and early-1990s, of around 65%.

This requires three policy changes. First, reduce bureaucratic delays.Cairn, for example, has been waiting for nearly two years to ramp up

production in its Mangala oilfield. Second, encourage more joint

ventures in exploring foreign oil and gasfields. ONGC Videsh's Russian

investments in Sakhalin-I and Videocon's fields in Mozambique, Brazil,

East Timor and Australia should encourageReliance

Industries(RIL),Essar,Adaniand other private sector exploration

companies to expand their global footprint.

Third, pursue the new shale gas strategy that the Prime Minister

outlined last month. By end-2013, shale gas exploration bids in six

Indian regions (Cambay, Assam-Arakan, Gondawana, KG onshore,

Cauvery onshore and Indo-Gangetic basins) could reveal long-term

potential.

Despite environmental concerns over deep-rock fracking and the cost

of technology, shale gas is already boosting America's domestic energy

production and reducing its historical reliance on oil imports.

http://economictimes.indiatimes.com/reliance-industries-ltd/stocks/companyid-13215.cmshttp://economictimes.indiatimes.com/reliance-industries-ltd/stocks/companyid-13215.cmshttp://economictimes.indiatimes.com/reliance-industries-ltd/stocks/companyid-13215.cmshttp://economictimes.indiatimes.com/reliance-industries-ltd/stocks/companyid-13215.cmshttp://economictimes.indiatimes.com/topic/Essarhttp://economictimes.indiatimes.com/topic/Essarhttp://economictimes.indiatimes.com/topic/Essarhttp://economictimes.indiatimes.com/topic/Adanihttp://economictimes.indiatimes.com/topic/Adanihttp://economictimes.indiatimes.com/topic/Adanihttp://economictimes.indiatimes.com/topic/Adanihttp://economictimes.indiatimes.com/topic/Essarhttp://economictimes.indiatimes.com/reliance-industries-ltd/stocks/companyid-13215.cmshttp://economictimes.indiatimes.com/reliance-industries-ltd/stocks/companyid-13215.cms

8/2/2019 vvim-

3/4

RIL's discoveries in the Krishna Godavari (KG) basin at the turn of the

century promised much but that promise, a decade later, remains

unfulfilled. Natural gas production from the KG-D6 fieldwas estimatedto yield 80 million standard cu m per day (mmscmd). It is

currentlyproducing less than 28 mmscmd, causing a huge crisis for

sponge iron plants across the country. Also hit are power projects

whose gas-fired plants are working at less than 50% capacity.

The government is locked in a dispute withRILover a host of issues

relating to gas pricing and approval of new investment in infrastructureto drill more wells in the contiguity of KG-D6. RIL last month finally

secured government approval to explore four satellite fields in KG-D6 at

an investment of $1.53 billion. This could provide an additional 10

mmscmd of natural gas.British Petroleum(BP), which last year

invested $7.2 billion to acquire a 30% stake from RIL in 21 oil and gas

blocks, has best-in-class expertise in new deep-sea drilling technology.

This will play an increasingly-important role in KG-D6's future

development. It is significant, however, that BP's statutory filings in

London indicate that proven reserves in the KG-D6 field are 1.4 trillion

cu ft - a mere tenth of RIL's own estimates.

The issue though is bigger than one or two private companies. India's

oil and gas exploration policy has been caught in red tape for over a

decade. With Reddy at the helm of the petroleum and natural gas

ministry, will things really change? The minister must set ambitious

targets. Indian crude oil demand, despite the growth of renewable and

http://economictimes.indiatimes.com/topic/RILhttp://economictimes.indiatimes.com/topic/RILhttp://economictimes.indiatimes.com/topic/RILhttp://economictimes.indiatimes.com/topic/British-Petroleumhttp://economictimes.indiatimes.com/topic/British-Petroleumhttp://economictimes.indiatimes.com/topic/British-Petroleumhttp://economictimes.indiatimes.com/topic/BPhttp://economictimes.indiatimes.com/topic/BPhttp://economictimes.indiatimes.com/topic/BPhttp://economictimes.indiatimes.com/topic/British-Petroleumhttp://economictimes.indiatimes.com/topic/RIL

8/2/2019 vvim-

4/4

alternative energy sources, will rise at least 60% from the current 3.7

million bbd to around six million bbd in 2021-22.

Assuming domestic crude production doubles in the eight yearsbetween 2013-14 and 2021-22 to two million bbd at a CAGR of 9%,

India will still need to import four million bbd. However, the

dependence on foreign crude would fall from 80% currently to around

67% - a realistic target that will constitute a significant advance in

combating our long-term trade and current account deficits.

If the price of crude roughly doubles in a decade to around $230 perbarrel, a reasonable estimate based on both economic and geopolitical

factors, the annual cost of India's targeted crude oil imports of four

million bbd would rise from $150 billion today to $335 billion in 2021-

22. Indian exports, currently $300 billion, are expected to grow at a

CAGR of 12-15% a year. Taking the lower growth figure in that range

(12%), our exports should be $800 billion by 2021-22, bringing the oil

import-to-total exports ratio ($335 billion/$800 billion) down from

today's inflationary level of over 50% to a more sustainable 41%. The

positive spin-offs on the rest of India's economy will be significant.

Minhaz Merchant

Chairman, Merchant Media