Policy Dilemma with Fossil Fuel

ENVIRONMENT/ GOVERNANCE

Topic:

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources.

Policy Dilemma with Fossil Fuel

Context: Recent Extreme Weather events

• In China, 1.2 million people were displaced in the province of Henan by what was reported as a “once in a 1,000-year downpour”. 
• In Russia, the Siberian city of Yakutsk, better known for its subzero winter temperatures faced the “worst-ever air pollution” because of smoke from 200 nearby wildfires. 
• In Europe, flash floods killed approximately 200 people in Germany and Belgium. 
• And in North America, city after city was scorched by unprecedentedly high temperatures.

In this background of destruction caused by climate change, the Ministry of Petroleum and Natural Gas faces a policy dilemma – how to redefine the supply-side priorities in the face of the imperatives of Atma Nirbharta when about 85% fossil fuels are still imported.

Issues plaguing the oil & Natural gas sector 

1. Exploration and Production(EP) in India is a high-risk activity

• Whilst India may well be sitting on substantial hydrocarbon reserves, as is claimed by our petroleum scientists, these reserves are not easy to locate and, even when located, difficult to develop and produce on a commercial basis. 
• Bulk of the recently discovered reserves are in complex geological structures and harsh terrain (Himalayan foothills or deep waters offshore). 
• The risk of EP is even greater today because of the longer-term structural softness of the petroleum market (i.e. falling prices in petroleum market due to rise of renewable energy)

2. Poor Productivity 

• The average oil recovery rate in India was around 28 per cent. That is, for every 100 molecules discovered, only 28 were monetised. 
• This number did not compare well with the global average of around 45 per cent for fields of comparable geology.
• This is due to factors like difficult geology, inefficient PSUs and lack of modern technologies.

3. Vulnerable to Market Fluctations

• Oil & Natural gas can face unexpected supply disruptions.
• Pre-Covid, India imported approximately 4.5 million barrels of oil, of which 50 per cent or so came from the Middle East, predominantly Saudi Arabia, Iraq and Iran. 
• This region faces deep political and social fault lines and there is no knowing when the supply lines might get ruptured.

4. Presence of Multiple PSUs

• In the upstream sector there are multiple PSUs like ONGC BPCL, IOC, HPCL, and GAIL that leads to “avoidable” costs of intra public sector competition and inefficiencies of “sub scale” operations 

Way Ahead

• Using enhanced oil recovery (EOR) technology that offers a relatively low-risk avenue for increasing domestic production.
• Building contingency safeguards like buffer stocks of around 35 days (presently 12 days) so as to cushion international shocks. This should be done by constructing a cavern in Jamnagar, the entrepôt that receives approximately 60% of India’s crude oil imports and is well connected through tanks and pipelines to the hinterland refineries.
• Restructure and reorganise the public sector petroleum companies: the upstream assets should be consolidated under ONGC (the upstream assets of BPCL, IOC, HPCL, and GAIL should pass onto ONGC) and GAIL should be unbundled into a public utility gas pipeline company.Hereafter, these companies should be encouraged to look beyond hydrocarbons to build an “energy” enterprise.

Conclusion

• Climate Change & Natural Gas Sector
• Paris Climate Deal