We need to explore the scope for acquiring energy assets abroad.
Prime Minister Manmohan Singh, September 20
I am delighted to formally announce the first flow of crude oil from the Krishna-Godavari basin.
Mukesh Ambani, Chairman and Managing Director, Reliance Industries, September 21
For those who think these two statements made in the past two days are intellectually slippery, here’s the bottom line. More than anything else, it is energy security that will drive India’s economic growth and help drill prosperity into the country. It affects the fortunes of countries and companies, investors and consumers and most important, it brings political stability.
When we talk about energy security, just what is it that’s insecure? Staring at us in the short-term is the sudden and sharp rise in oil prices since the beginning of the year. At $107 per barrel, down from its $145 peak in July 2008, the price of oil is still more than double of its January 2007 level. What that means for a country like India that imports 70 per cent of its oil requirements can be gauged by the panic priority that our policymakers have been in on that front, of late.
We have tasted what 12 months of this relentless rise can mean to our economy, our companies and our homes. Rising oil prices have driven inflation to above 12 per cent from below 4 per cent in January 2008. The government’s subsidy bill stands at $26 billion, 70 per cent of which is accounted for by petroleum. Corporate profits have not been affected so far but there is a general sense of financial tightening that can be sensed across the board. Households, are negotiating the stress of daily life in their vegetables, fruits, fuel and their EMIs.
Next comes the threat of terror. For developing countries like India, the bringing down of any rig or refinery anywhere cannot be taken in stride. Hence, investment in energy security has to go along with investment in terror prevention.
But even these challenges are not enough for countries like India, which have tasted the fruits of a fast-track development model only in the past few decades. In the India of today, not only do we have to ensure a rising and regular supply of energy, we also have to make sure it’s environmentally clean. Worse, the finiteness of resources is visible — the oil and gas expected to flow out of Reliance’s D6 field over the next six to eight quarters will dry up in 10-12 years. The cost of exploring for oil, too, has gone up, as the luxury of shallow sea drilling is ending and companies have to increasingly set up deep water installations, on the sea bed, run by robots. In terms of quantities, while D6 adds 40 per cent to India’s production capacity, it is neither enough (it barely scrapes through to the 50 per cent self-sufficiency mark) nor can it be measured this way when energy demand is growing at 5 per cent per annum (it will double in less than 15 years). Nuclear energy will add its weight but it still won’t be enough in the medium term.
There is no quick fix to this problem. There are, however, three responsibilities that we must be willing to take. The first is making energy security a political agenda. In every manifesto in the May 2009 election, the phrase ‘energy security’ must be one of the overarching goals. Work on building strategic reserves worth 30-120 days is critical. Dissemination of energy literacy must be taken up. Armed with $20 billion in cash, the public sector unit tag on Oil and Natural Gas Corporation Ltd should be loosened (See story on Page 25) to exploit global oil fields — which it will find easier to negotiate than Reliance, given the comfort of G-to-G transactions. Finally, fuel pricing — minus the exorbitant duties on it — should get market linked, with focused subsidies for the needy.
Second, at the firm level, energy productivity must be maximised. Because of rising prices, some of that is underway. The responsibility for senior managements is to look at energy as an ‘asset per annum’ resource rather than an ‘expense’ and attempt to squeeze more out of less. Going forward, energy has the possibility of becoming the biggest expense on the profit and loss and will impact stock market valuations. As a corollary, oil firms must open their R&D purses. At the D6 unveiling, Ambani told me he was working with MIT for innovative solutions in alternative energy. He’s also looking at hydrogen, thus far in laboratories, and is waiting for “some kid to crack the technology”. Surely, there are huge profits lying in solar, wind and tidal energy waiting for a brave innovator-capitalist to deliver super normal profits.
Finally, as households, it is our responsibility to make energy conservation a priority. When I asked a senior executive of a power company why our electricity bills have been rising, he said the number of gadgets in the always-on mode have increased. Inverters that have a huge generation loss are drinking power all the time. The rest comes from wealthier lifestyles. On the fuel front, we as consumers, over the next five years, will have to embrace green, even if the colour is more expensive.
The alternative in a commodity that has become a ‘seller’s market’ since 1973, is invisible — so far.