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Last Updated : Jun 06, 2019 04:50 PM IST | Source: Moneycontrol.com

What are the challenges for the new government in hydrocarbon sector

The import dependency of crude oil and LNG during 2018 increased to 82.59 percent and 45.89 percent, respectively, and this may rise further in the days to come

Moneycontrol Contributor @moneycontrolcom

After the NDA won a decisive mandate in the recently concluded general elections, a new Cabinet, under Prime Minister Narendra Modi, has taken charge on June 1. With Dharmendra Pradhan being retained as the Minister for Petroleum & Natural Gas, one can expect that the strategy and priorities that were seen in the last five eventful years of the NDA government will continue.

Among the identified challenges the new government will face in the hydrocarbons sector are:

Reducing import dependence

One of the stated objectives of the previous Modi government was to reduce dependence on oil imports. Although the government initiated several measures to achieve this, import dependency on crude oil and LNG during 2018 increased to 82.59 percent and 45.89 percent, respectively, and this may rise further in days to come.

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The new government will have to renew its emphasis on greater domestic production of crude and gas, increased exploration efforts, curbing consumption, mixing biofuels with petrol and diesel to reduce imports and switching to electric modes for transportation.

Rising import price of crude

Any rise in global crude prices will have a major impact on the economy as India imported 207.3 million tonne of crude oil in 2018-19 and total petroleum import ( Rs 7,028.37 billion) was 23.42 percent of total gross import (Rs 3,0010.2 billion) of the nation.

The impact of higher crude prices affects the economy in three ways. First, India’s oil import bill shoots up, thereby worsening the trade deficit. According to the rule of thumb, every $5 per barrel increase in crude price pushes up import bill by $10 billion provided the currency remains stagnant.

Second, higher oil prices might result in a fall in overall GDP growth rate of India. Growth has already slowed to 6.6 percent in the October-December quarter, the slowest in several quarters.

Third, higher global crude prices could lead to a weaker dollar-rupee, higher inflation and larger current account and budget deficits. “Every $10/ bbl increase in crude oil prices increases the fiscal deficit by about 0.1 percent of GDP," according to ICRA, a credit agency.

Finding new sources for crude oil import
With the US ending all waivers on Iran sanctions, the new government will have to muster necessary courage to either defy the US and continue to import from Iran or find new sources of oil to replace the 23.9 million tonne of oil imported from Iran. For the time being, indications are that the new government will try to tap countries such as US, Mexico and Nigeria to make up the shortage.

Imports from the US are now being ramped up. In 2017-18, the first year of imports from the US, supplies stood at 1.4 million tonne. This has jumped more than four-fold to 6.4 million tonne in 2018-19. In February, Indian Oil Corporation, which was only purchasing oil from the US through spot tenders, finalised the first term contract for import of up to three million tonne of crude oil of US origin grades as part of its strategy to diversify term crude sources. Norwegian oil company Equinor would supply a variety of US crude grades under the contract valued at around $1.5 billion.

However, there are some issues in importing oil from the US: the cost of transportation for the 40-day journey. This makes US shale more expensive for Indian refineries to process, effectively increasing the price of output.

Lack of port loading facilities from all other Gulf of Mexico ports will mandate use of smaller Aframax or Suezmax tankers. At present, Louisiana Offshore Oil Port in the US is the only one capable of directly loading a VLCC and crude shipments.

 Bringing petrol under GST

While petroleum crude, high-speed diesel, motor spirit, natural gas and aviation turbine fuel are constitutionally included under GST, the date on which GST shall be levied on such goods has not been taken yet. The new government will require the recommendation of the GST Council, where all the states are represented, to decide the date when to bring petroleum products under GST. Article 279A (5) of the Constitution provides that GST Council will recommend the date on which GST shall be levied on petroleum crude, high-speed diesel, motor spirit, natural gas and aviation turbine fuel.

Higher dividends from OMCs will impact their investment plans

The new government will have to make a judicious balance between mandating oil marketing companies (OMCs) to pay higher dividends or increase their productive investments.

In order to meet its budgetary targets, the Ministry of Finance under the stewardship of Arun Jaitley had asked cash-rich PSUs to pay a second interim dividend as well as undertake a share buyback. Accordingly, OMCs -- IOC, Bharat Petroleum Corporation and HPCL -- and upstream entity Oil India (OIL) declared higher interim dividends of 67.5 percent to 110 percent of the face value of their shares and undertook share buybacks in FY19.

The higher outflow due to higher dividends and share buybacks might impact the investment plans of OMCs.

Retailing of transportation fuels

Even as OMCs are furiously expanding their retail network -- they want to allot 79,770 new petrol pumps over the next three years -- the new government will have to take a relook at the norms for licensing companies to retail petrol and diesel. According to current rules, only companies that have invested Rs 2,000 crore in hydrocarbon exploration and production, refining, pipelines or liquefied natural gas (LNG) terminals can retail petrol, diesel and aviation turbine fuel.

A high-level expert committee, which has just recently submitted its report, has suggested scrapping of the Rs 2,000 crore investment norm and free up fuel retailing but wanted retailers to necessarily set-up outlets in rural areas as well.

(The author is from Escorts Securities)

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First Published on Jun 6, 2019 04:50 pm
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