16 / 100
Africa. The US and Europe are still trying to firm up a grand
strategy to counter the combined China-Russia challenge.
In contrast, India suffered a sharp decline in its
international prestige towards the end of 2019, when the
government of Prime Minister Narendra Modi passed a
new citizenship law that was seen as discriminating against
Muslims. This could affect its efforts to improve energy
security through better ties with Middle East oil producers.
Similar to his predecessors, Mr Modi has struggled
to improve India’s energy self-sufficiency, as the country
continues to depend on oil imports to meet rising domestic
consumption. Attempts to draw oil investments from Saudi
Arabia and the UAE have yet to yield substantive results.
Uncertainty in Saudi investment
Despite the recent flurry of announcements about impending
deals, Saudi Arabia is still no closer to making its first
investment in India’s 5 million bpd oil market.
State-owned Saudi Aramco said it has signed an agreement
to store crude oil in one of India’s underground terminals while
it aims to become a minority partner in the oil and chemicals
business of privately-owned Reliance Industries Limited (RIL).
There is also talk of Saudi interest in taking a stake in an Indian
state-owned oil refinery, as well as participating in the retail
fuels business in Asia’s second largest oil market.
For now, the deal closest to reality is Saudi Aramco’s
proposal to store 4.6 million bbls of its crude in the
18.4 million bbl Padur terminal in the southwestern state of
Karnataka. Saudi Aramco signed the agreement with Indian
Strategic Petroleum Reserves (ISPRL), the operator of the state-
owned terminal, during Prime Minister Modi’s visit to the Saudi
Kingdom in late October 2019.
The quantity to be stored is small, making the risk
acceptable to both sides. But despite hopeful reports in the
Indian media, Saudi Aramco is unlikely to be interested in
purchasing New Delhi’s 53.29% stake in Bharat Petroleum Corp.
at a reported price of US$10 billion.
The deal that everyone awaits is Saudi Aramco’s proposed
acquisition of a 20% stake in RIL’s downstream oil and
petrochemicals business for US$15 billion. This was expressed
in a non-binding letter of intent signed by the two companies
in August 2019.
“Saudi Aramco and RIL have a long-standing crude oil
supply relationship of over 25 years,” said RIL. To date, the
Indian firm has purchased over 2 billion bbls of Saudi crude
for processing at its refinery in Jamnagar, in the northwestern
Indian state of Gujarat.
If a deal is concluded, Saudi Aramco would commit to
supply as much as 500 000 bpd of crude to RIL’s refinery on
a long-term basis. Most importantly, it would send a signal
that India is serious about opening its strategic oil industry to
foreign and private investments. That hope was undermined
on 20 December 2019, when the Indian government applied
to the Delhi High Court to restrain RIL from selling off its oil
and gas assets. It affirmed the industry’s suspicion that the
decades-long courtship over joint oil investments between the
two countries has largely been a charade.
While India’s oil market continues to grow, private
companies, especially international majors, are wary of making
large investments due to the government’s active role in
‘managing’ the industry and controlling oil prices. Indian oil
refiners and retailers are forced to subsidise prices at the
pump, resulting in their suffering massive losses every year. A
Saudi investment in India’s hydrocarbon sector may yet be out
of reach.
An increase in oil demand
India is unlikely to resolve its energy supply challenge for at
least another 20 years, judging by the latest oil forecast issued
by the Organisation of Petroleum Exporting Countries (OPEC).
The cartel predicts that between 2018 and 2040, India will
have the world’s fastest growing oil market, with consumption
expanding at a rate of 3.58% per year. Other countries will
trail far behind, including China, which is projected to increase
its oil use by a ‘mere’ 1.36% per year over those 22 years,
according to OPEC’s World Oil Outlook 2040. Rather than
wear this as a mark of achievement, India’s state planners
will be worried that they are failing to rein in the country’s
runaway energy demand.
If OPEC’s prediction holds true, India will be consuming
10.5 million bpd of oil in 2040, more than double its 2018 rate
of 4.7 million bpd. Over that same period, its share of the
world’s oil market will rise from 4.8% to more than 9.2%.
Even with the prospect of the US becoming an important
new supplier, much of India’s oil will still have to be imported
from politically unstable producing countries in the Middle
East, Africa, and Latin America, as well as Russia.
Owing to its inability to attract sufficient foreign as well
as private capital into the oil sector, India’s dependence on
imports reached a record high of nearly 85% in 2019. There is
little indication that this high level of import dependence will
decline much, despite Prime Minister Modi’s promise to boost
domestic production.
Since taking office in 2014, the Modi government has
overseen a steady decline in India’s domestic oil production,
from 905 000 bpd to 869 000 bpd in 2018, according to BP.
Over the same period, the country’s proven oil reserves have
fallen from 5.7 billion bbls to 4.5 billion bbls.
Foreign companies remain wary of
making big bets, as they are not fully
convinced the government is ready to
allow private capital to take a bigger
role in an industry deemed strategic to
national security. But the clock is ticking
fast as India’s oil appetite remains strong,
driven by its young population and a fast-
growing economy.
Table 1. IMF’s projections for CCA’s economic growth
2018
2019
2020
2021 - 2024
Energy exporters*
4.1%
4.3%
4.4%
4.5% per year
Energy importers**
5.2%
4.9%
4.5%
4.5% per year
*Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan.
**Armenia, Georgia, the Kyrgyz Republic, and Tajikistan.
14
World Pipelines
/
MARCH 2020