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What US Shale Oil Imports Mean for India

Pyaralal Raghavan (plrvan@hotmail.com) is a senior journalist who writes on economics.

India has imported its first shipment of shale oil from the United States, the fastest-growing oil producer in recent years. This is a significant step for India as it will now be less dependent on oil from West Asia, opening access to more risk-free oil and better prices. Yet concerns remain. India is consuming oil at a fast rate, while domestic production is falling. It will continue to be dependent on oil imports for its energy security, and will have to further diversify its sources of oil imports.

The docking of the first shipment of shale oil from the United States (US) at Paradip port, Odisha is a significant landmark in India’s quest for cheap oil. This indicates that India, which has heavily relied on imports of oil from West Asia for decades, has finally realised that despite its best efforts to diversify its oil imports, by tapping new regions like South America and Africa and investing in oil assets across the globe, it has slipped on this front and there is still an urgent need to tap newer markets like the US, whose surging shale oil production offers new opportunities.

Tapping into the US shale oil market, though still a small niche market, offers the largest long-term potential, will ensure that India would be able to tap into yet another new buoyant oil source. Such a step will not only help it retain its bargaining power with existing suppliers, but will also enable it to keep import prices at lower levels.

Thus, imports of shale oil into India is a step towards bolstering energy security. This reduces India’s dependence on OPEC (Organization of the Petroleum Exporting Countries) nations, while tapping into the US, which has been the fastest-growing oil producing nation in recent years. This is especially relevant in a scenario where the US has not only replaced Saudi Arabia and emerged as the single-largest oil producer in the world, but has also become the nation with the most buoyant investments in the oil industry even while the rest of the world is slowing down new investments in response to shrinking demand for oil in advanced economies.

Access to Risk-free Oil

An important aspect of improving energy security for India is of ensuring that its access to risk-free oil is increased, especially in the face of the continuing instability in West Asia. Most recent figures for India’s import basket of oil in 2015 indicate that Saudi Arabia remains the largest supplier providing one-fifth of India’s oil imports, while Iraq and Iran contributed 17% and 6% of the oil supply while other West Asian nations provided another 16%. The total share of India’s oil imports from West Asia is as high as 59%. India’s two other major oil suppliers are in Venezuela in South America and Nigeria in Africa, each contributing 11%, while other African nations contributed another 8%.

However, India has so far not been able to tap the full oil potential of important oil producers like US and Russia who have emerged as the largest and third largest oil producers, respectively, in recent years (Table 1) but contribute only a meagre 4% of Indian oil imports. Though India has tried to make up for this lacunae by investing in oil fields, especially in Russia and the US, including in shale oil by private sector investors like Reliance Industries, the gains have not been commensurate with the fast changes in the global oil industry. In fact, Reliance Industries has even sold a major part of its investments in the US shale oil. Most recent numbers for 2016–17 show the production of oil and gas from India’s overseas assets has gone up to 16 million metric tonnes which is only about a tenth of India’s oil and gas imports.

India’s efforts to further diversify its oil import basket to shale oil from the US should also be seen in the context of the recent decision of the OPEC nations to enforce production cuts and firm up prices, which is a sharp reversal of the earlier move to expand production and grab a larger market share. The decision of the OPEC nations to ensure a comprehensive reduction in OPEC oil output by 1.8 million barrels per day to prevent the further fall in international crude oil prices, which went to even below $30 a barrel in early 2016, has caused global output of oil to decline in the early months of 2017 and allowed oil prices to firm up once again.

Slower Output and Investment

However, the fall in international oil prices in recent years has already taken a toll on investments in the oil industry. According to the figures supplied by the International Energy Agency (IEA), upstream investments in oil and gas industry fell by 25% in 2015 and again by 26% in 2016, which is sure to have long-term repercussions on the global supply of oil, especially from both large and small suppliers who have cut investments.

Apart from the falling prices the other reason for the slowdown in global investments in the oil sector is the anticipated decline in oil demand in Organisation for Economic Co-operation and Development (OECD) countries which is now expected to fall by an average 0.2 million barrels a day each year till 2022. However, this is to be more than compensated by the increase in demand by 1.4 million barrels per day from India and China with India’s demand picking up faster even as China’s demand slows down following its shift from infrastructure and manufacturing sector-led growth to a services sector and consumption-led economy.

In fact, demand for oil from China has steadily slowed down from 5.5% per annum in the five years up to 2011 to 4.8% in the next five years ending 2016 and is now expected to fall further sharply to 2.4% in the period up to 2022 and push down demand for global oil. In contrast to this scenario India’s demand for oil will gradually pick up with the per capita consumption of oil going up from the current level of 1.2 barrels per year to 1.5 barrels per year by 2022.

But meeting India’s increasing thirst for oil is going to be a difficult task when major oil producers cut down new investments in response to falling prices and slowing demand in advanced economies. The only ray of hope for India in this otherwise dismal global oil industry scenario is the pick-up in production and investments in the US light tight oil region, namely by the shale oil producers. As the IEA points out, the US light tight oil producers have not only raised output in recent times but were even able to ensure cost reductions of 30% in 2015 and 22% in 2016 which indicates that they are well placed to further raise production even in a scenario of low global oil prices.

According to IEA projections, if the increase in drilling activity by the light tight oil producers in early 2017 are sustained for a longer period it will raise US production by 5,00,000 barrels per day by end of 2017 and annual production will gradually perk up by 1.4 million barrels per day by 2022 even in a scenario where oil prices remain below $60 per barrel. However, if oil prices become more buoyant and go up to $80 per barrel, US light tight oil production will go up by as much as 3 million barrels per day by 2022.

Therefore, India has no option but to tap the potential of the new shale oil markets, which have pushed the US to become the largest oil producer in the last few years, if it is to meet its growing oil requirements. This is especially so since India’s ability to develop its own shale oil market is very limited. Though Indian public sector oil companies like Oil India and Oil and Natural Gas Corporation have started drilling wells for exploring the possibilities in shale gas and oil, the prospects are not very encouraging as available information so far indicates that its prospective reserves of shale oil and gas are even lower than that of Pakistan which figures among the top 10 nations with the largest reserves in this new niche market.

However, large-scale imports of light tight oil or shale oil will throw up both new challenges and opportunities for refiners. But this can be successfully overcome as done by US refiners who used new process designs and new generation catalysts to ensure optimum use of existing and new facilities and refine light tight oil. The experience of the US is that optimisation of existing refinery configurations to process tight oils have even increased profit margins of refiners.

Another important by-product of the growth of oil import from the US is that it will help correct the growing trade imbalance between the two countries to some extent. India’s trade balance with the US have steadily deteriorated in India’s favour in recent years, with the trade surplus growing to as much as $19.7 billion in 2016–17. This is not only in contrast to India’s overall trade deficit of $108.5 billion in 2016–17 but also in relation to the trade deficit with China, the second largest economy in the world, where it has now bloated to $51.1 billion in 2016–17. A fall in trade surplus with the US in coming years following a pickup in US shale oil imports will hopefully correct this imbalance and help further boost economic and strategic relations between the two countries.

>Most Buoyant Oil Buyer

Improving access to new sources in the global oil market is especially important for India as its domestic production has remained stagnant and even declined in recent years. India’s indigenous crude oil production which was 37.9 mmt in 2012–13 has marginally declined in the last four years to 37.8 mmt in 2013–14 and then to 37.5 mmt in 2014–15 and further to 36.9 mmt in 2015–16 and finally to 36 mmt in 2016–17, that is, a decline of almost 2 million tonnes over the last five years. Consequently, India has no option but to further step up its efforts to ensure a steady increase in supplies from global markets.

Apart from the falling indigenous production, India’s efforts to diversify its oil import market also has a lot to do with the discriminating market strategies of OPEC nations, who have for long charged a surcharge on oil importing Asian nations despite the emergence of developing nations of India and China as the most buoyant oil markets in the world. So much so that a BP oil report points out that a major part of the 1.6 million barrels per day increase in global oil demand in 2016 was contributed by them.

While the rise in demand for oil from India in 2016 was an unusually high 0.3 million barrels per day, that of China was 0.4 million barrels per day. In contrast, the rise in oil demand in the US was relatively more subdued—0.1 million barrels per day—while that of Europe was little more respectable—0.3 billion barrels per day. A common factor was that the rise in oil consumption in most nations were buoyed up by the falling gasoline prices.

Most recent numbers for 2016 show that India is now the third largest consumer of oil in the world with its demand of 201.6 million tonnes next only to that of 863.1 million tonnes in the US and 578.7 million tonnes in China. While India accounted for 4.9% share of the global consumption of 4,418 million tonnes, the US accounted for 19.5% and China 13.1% (Table 2).

But what makes India’s growth in oil consumption ominous is that it was the highest across all major countries. Oil consumption in India grew by 8.3% in 2016, that in China was only 5.5% while that of the US was a meagre 0.5%. Long-term trends show that India’s oil consumption grew by 4.9% per year in the 2005–15 period and was only marginally lower than the 5.5% growth in China. But with trends accelerating in recent years, India’s oil consumption growth is likely to overtake China soon. In contrast, the US, which has emerged as a major producer of oil, has seen its consumption decline by 0.5% in the 2005–15 period.

With India guzzling oil at such high speeds (Table 3), the country has no option but to look for new sources and diversify its import baskets to help hold its oil import bill in check. This is because with oil prices once again firming up in the global markets, India realises that its oil bonanza that it reaped in the early years of the decade will vanish quickly. Indian crude oil prices which had first declined marginally from the peak level of $111.89 per barrel in 2011–12 by a marginal 3.5% and 2.3% to $107.97 and $105.52 in 2012–13 and 2013–14 had picked up pace in the later years with import prices slumping by 20.2% to $84.16 in 2014–15 and further by 45.1% in 2015–16 to $46.18 per barrel (Table 4).

However, the trends have changed since then with the oil import prices picking up marginally by 3% to $47.56 in 2016–17. And more recent trends show that though the international oil prices are unlikely to go anywhere near their previous peaks, the pick-up might still accelerate. One big gain of the falling international crude oil prices was the substantial reduction in oil subsidies which had a strong positive impact on fiscal management.

Numbers show that Indian oil subsidies, which had steadily gone up from ₹40,000 crore in 2005–06 to a peak of ₹1,61,029 crore in 2012–13, had seen a sharp fall since then. In fact, oil subsidies of the government fell to ₹1,43,738 crore in 2013–14, ₹76,285 crore in 2014–15, ₹27,571 crore in 2015–16 and ₹22,738 crore in 2016–17.

Though the under-recovery on petrol and diesel have been fully eliminated by ushering in market pricing, that of other products continue. In fact, direct benefit transfer of liquefied petroleum gas (LPG) subsidy on domestic LPG was ₹12,133 crore in 2016–17 while the Pradhan Mantri Ujjwala Yojana subsidy on domestic LPG was ₹2,999 crore. Subsidy on kerosene was however only a marginal ₹11 crore in 2016–17. Initial trends for 2017–18 show that the trend of falling oil subsidies may be reversed as the oil price bill has already gone up to ₹7,069 crore in the first quarter of the financial year (Table 5). Keeping the oil subsidy bill in check also requires that India further diversify oil imports to new markets to help soften international prices.

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