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Why is our Crude Output Declining

 

An analysis as to why do we import majority of our crude oil demand

Oil is precious. But did you know that India’s economy would only continue to grow at an 8%-8.5% rate if oil prices stayed around $70-$75/barrel?

We aren’t saying this, the recently concluded Economic Survey is. But prices won’t go down if the imports (that currently stand at 85% of the oil we need) won’t go down.

And here lies our biggest problem. Curtailing our imports is difficult because our oil production is severely declining.

This month it reached a 28-year low of 28.4 million tonnes (roughly 3,817,204 barrels of oil).

But why is our oil output declining, when the world’s output is rising?

Our perennial Oil challenge….

As far as oil is concerned, India is doomed by mother nature.  The oil reserves that we have are very low as compared to countries like Saudi Arabia.

But they aren’t that low. We have reserves worth 4,728,790,000 barrels , much higher than that of some developed countries like the UK (crude oil output of 1,083,928.37 barrels per day ).

So, why has our production output gone down to 0.08% of our reserves?

The problem here is that we haven’t discovered any major oil wells in quite some time.

Our last major oil well discoveries took place in 2004.

So, why aren’t we exploring? Because not only is exploring difficult, but it is also very costly.

Companies need to invest in high-end tech to make sure they are able to discover oil.

And this expensive process, which also ends up taking years on end, doesn’t always promise results. So, most private companies do not invest much in oil exploration.

Especially because even though they are successful they have to share profits with the government and also have to pay a 20% cess on any crude oil that they produce.

This also increases the costs of domestic crude oil putting producers at a disadvantage as compared to importers.

So, the major burden of exploration falls on state-owned ONGC which is also India’s biggest oil producer, (accounting for 76.7% of all domestic production).

But even ONGC has been unable to explore much. It has become an acquisition machine.

When the Gujarat State Petroleum Corporation wanted to divest off its Deen Dayal Field to avoid a loan default, ONGC stepped in to buy it even though it did not have the tech to extract oil from it.

In 2018, when the government wanted to increase its revenue and meet disinvestment targets, ONGC bought Hindustan Petroleum Corporation Limited from it.

These acquisitions, plus orders from the government to subsidies crude oil products, have put the company in major debt. It currently has an outstanding debt of Rs. 1,23,945 crores.

So, exploration is not an option. What’s the solution then?

Is Partnering with Foreign Companies, the solution…

Many foreign companies have developed tech that has made exploration much easier and faster. That’s how Cairn was able to find an oil field in Rajasthan where even ONGC and other companies could not.

But because of an internal reorganization, India demanded retrospective taxes worth Rs. 10,200 crores from the company.

And when it refused, the government seized dividends and withheld tax refunds (it has since returned these refunds after a court sided with Cairn ).

Such mistreatment could have alienated further foreign participation in India.

But we are trying to rectify this by introducing new laws that make investing in India more lucrative.

Companies can now identify areas they want to explore and bid for them instead of exploring only in government-identified areas.

They are now allowed to pay the government a share in profits only after their initial investment costs have been recovered.

The process of getting exploration and production licenses has also been made easier.

Also, to make sure the development of fields continues despite ONGC’s debt and its slow approach, the government is also privatizing some ONGC owned fields that are lying unused.

After these new rules, some private players have shown an interest in oil exploration. Vedanta pledged $4 billion towards oil exploration this year.

However, given the fact that we have limited resources and a lot of our oil wells are drying up, maybe we should look to exploring alternatives to crude oil.

Like sustainable biofuels made from algae and microbes.

This could help us reduce import dependence until we can go fully green.

Summarizing, India has enough oil reserves to greatly reduce our imports but because companies aren’t looking for it we have to keep importing.

 

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