Recent geopolitical developments and the consequent impact of crude prices have put a strong question mark for India. Being among the fastest growing large economies with aspiration to enter the $5 trillion economy club soon, India is energy-hungry. As per BP World Energy Outlook 2021, India’s primary energy consumption is expected to more than double by 2050. Major energy disruptions threaten the growth story of India.
India is heavily dependent on energy imports, particularly for crude oil and natural gas, which get converted into everyday fuels like petrol, diesel, kerosene, city gas, etc. India is also among the largest users of LPG which is a key household fuel. India imports 85% of its crude oil and 55% of its natural gas requirement. The current unstable geopolitics is bound to impact its energy industry and economy. Weakening of rupee against dollars further compounds the impact. The Indian crude oil basket surpassed $100/bbl mark on February 24 last – first time since September 4, 2014, with the marker Brent crude touching $130/bbl in early March. It has since eased a little. It is expected that the crude oil price will remain volatile in the near future until geopolitical tensions ease or producers decide to substantially raise production.
The recent developments need to be assessed from two distinct aspects. The first is supply security and the second being the economic impacts. On supply security, there are no immediate concerns for India. Crude oil imports from Russia constitute about 1.5%-2% by our public sector refiners. There is no threat on the import of LPG from Russia as 95%-96% LPG is imported by PSUs from suppliers in the Middle East on a term basis. Thus, there doesn’t seem to be major supply disruption due to current geopolitics. However, economic impacts of high prices can be significant. Sustained high oil and gas prices may pose a challenge to the economic recovery, which had just picked up post pandemic, and lead to higher inflation. The world of energy is interconnected and, if there are significant disruptions to Russian supplies to the global hydrocarbon basket, the effects on prices may be sustained.
Hence, in the short-term, India does have a challenge given the large import dependence. That said, this provides further signals to accelerate the search for alternative energy resources, move even more quickly to renewable energy and other clean indigenous resources, and make significant structural changes that ease the artificial constraints and distortions that hold back the scaling up of such opportunities.
Seven strategies
India should pursue seven strategies –
1. Augment exploration of hydrocarbons, enhancing the domestic production of oil and gas by adopting new and innovative technologies.
2. Accelerate electrification of the economy including for electric mobility, energy for buildings, industrial production and other amenable applications.
3. Expand renewable energy, energy storage in various forms, green hydrogen and other frontier technologies. Energy storage would include batteries, pumped hydro and also strategic crude storage which needs to be significantly enhanced.
4. Scale up energy efficiency and circular economy programmes rapidly.
5. Invest in research and development to evolve new technologies that address India’s needs and suit its resource base
6. Deepen the energy, environmental and financial markets to allow for seamless integration of the various resources and further innovation.
7. Co-opt the start-up ecosystem into all of the above. Rapid innovation at scale by start-ups has indeed been a hallmark of recent years.
India recently unveiled its national plan to fight climate change and announced a five-point agenda mostly setting targets for decarbonisation and enhancing share of clean energy. The above would be very consistent with India’s climate goals. That said, we need to up the game on domestic hydrocarbon production. Despite the anticipated intense growth in renewable energy supply and consumption, India is expected to remain significantly dependent on oil and gas to meet its energy demand.
India’s crude oil production has declined by 5% and gas production by 8% during 2020-21 over 2019-20. Fast-tracking monetisation of discoveries and improving production from mature fields by leveraging data analytics is very necessary.
There is a need to move aggressively towards alternatives to imported hydrocarbons. The new National Biofuel Policy focuses on waste-to-wealth creation and targets to generate various types of biofuels from agricultural residue and municipal waste. The Sustainable Alternative Towards Affordable Transportation (SATAT) initiative of the government sets a goal of setting up 5,000 Compressed Biogas (CBG) with an aggregate production capacity of 15 MT by 2025. While the scheme has generated significant interest from private entrepreneurs, progress on ground has been sluggish. Recent push to achieve E20 blending targets (20% of ethanol blending in petrol) by 2025 marks a significant stride. Availability of adequate ethanol supplies and availability of flex fuel vehicles is key to enable E20 ambitions.
This is the first instance of war related destabilisation in continental Europe in over seven decades, the length and effects of which are yet unknown. For India, this is a clarion call to find alternatives that do not seriously impair its economy in the face of distant geopolitical dynamics. Fortunately, indigenous clean energy options have now become more possible and prevalent. This is the moment to seize the opportunity and transform the energy economy.
(The writer is National Head, Energy, Natural Resources and Chemicals, KPMG in India)
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