Kautilya: Oil's Well in India

India Today, December 21, 1998
Dec 21, 1998

KAUTILYA
Oil's Well in India

But low prices should not kill aggressive exploration.

Jairam Ramesh

In a world mindful of momentous anniversaries, a global silver jubilee has just passed by without even a whimper. It was in October-November 1973 that the Organisation of Petroleum Exporting Countries (OPEC) first jacked up oil prices with a bang and caused convulsions in the world economy. Since then, the world has experienced oil price shocks in 1979, when the Iranian revolution struck and in 1990-91, when the Kuwait crisis took place.

But what a strange sight stares at us today. In constant 1998 dollars, the price of oil has dropped to a 25-year low of $10 a barrel. The slow growth of the world economy in 1997 and 1998 has contributed to this unusual situation. But a powerful combination of technological factors and market forces have eroded the oil cartel's influence.

When OPEC first hit the headlines, the doomsday pundits went to town. But they were proved wrong for four reasons. First, the world is using oil more efficiently in industry and in transportation. Second, new sources of oil have sprung up -- most notably in Mexico, the North Sea, the Caspian Sea and offshore West Africa. OPEC countries are sitting on 75 per cent of the world's oil and gas reserves but account for just 40 per cent of global production.

Third, improvements in technology are enhancing the extraction of oil from existing reservoirs. Daniel Yergin, a noted Boston-based oil expert, says information technology (IT) has allowed companies to search for oil and make a profit at $15 a barrel, which is about half the earlier threshold. As an example, Yergin points to the adaptation of the computer visualisation techniques that Hollywood used in movies like Jurassic Park for three-dimensional seismic visualisation of potential reserves deep underground. Fourth, natural gas has emerged as a major alternative to oil. This has been particularly so in power generation.

India's degree of self-sufficiency in oil and oil products has fallen from 70 per cent to 40 per cent over 15 years. We import half our kerosene and about a fifth of our diesel needs. But the soft oil prices have cushioned the impact of these large imports on our balance of payments. Now, just one-fifth of our total imports are of crude oil and petroleum products.

Our current refining capacity is about 60 million tonnes. In the next five years alone we will add a huge 69 million tonnes of capacity. The Reliance Group is constructing the world's largest oil refinery in Jamnagar. This quantum leap in refining capacity will call for matching investments in ports and pipeline networks, something that is not happening fast enough. For example, the crude handling capacity of one port alone, Vadinar in Gujarat, has to quadruple by 2002.

Our real weak point is not oil refining but oil exploration. Oil planners use a concept called the reserve replacement ratio (RRR). At a minimum, the RRR should be equal to one. That is, for every tonne of reserve depleted another tonne is added to the reserves discovered. But now it has fallen to below one. This equation implies reserves are being depleted faster than they are being discovered.

We are horribly under-explored. India's prognosticated geological reserves of oil and gas are around 26 billion tonnes, of which just 25 per cent has been actually established. We have yet to wake up to the fact that natural gas, not oil, appears to be our predominant hydrocarbon resource. This is surprising since processes to convert natural gas to diesel, our main need, are now available commercially.

Around one-fifth of our reserves are in the troubled North-east. The development of these reserves will depend critically on our ability to deal with -- in a more sensitive manner than we have demonstrated so far -- political and social problems that beset the states in this region.

Technology is the key. Elsewhere, 40 per cent of the oil reserves are being extracted. But in India the figure is just around 28 per cent. Also, horizontal drilling methods are increasingly being used; these are specially relevant for the type of small and medium structures that we are now discovering.

India has yet to tap rich reserves in what geologists call the mesozoic strata. This means going to depths beyond 5,000 m onshore and over 400 m water depth in deep sea offshore. In contrast the depth of water at Bombay High, our most prolific oilfield, is only 40-50 m.

India competes for exploration investments with countries like China, Vietnam and Kazakhstan. We are less richly endowed than these countries. We also keep the best areas for the public sector. Hence the lukewarm response to our offers. Of over 100 blocks put up for offer only 22 contracts have actually been signed so far. Our time-consuming procedures have not helped either.

Decision-making is further hampered by the fear of public interest litigation, audit reports and parliamentary questions. The radically new and bold oil exploration policy announced in P. Chidambaram's February 1997 budget is still waiting to be operationalised. The man behind this policy, the then petroleum secretary, is now the finance secretary. Will he seize the initiative? Or will he prove the adage that in the government where you stand depends on where you sit?

The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own.

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