India's shaky energy security and growing dependency on foreign fuels

New Delhi is yet to announce a comprehensive and detailed policy across the energy spectrum to tackle this very real threat to economic growth

One can argue that energy security is of greater importance than national security. A country can always defend or strike back in case of an invasion, just as Ukraine is pushing the Russians back. But, if someone pulls the plug on supplies of oil, coal or natural gas, as Russian supply cuts to Europe now and Saudi Arabia led oil embargo targeting western nations in 1973 show, there’s a nasty impact on a country’s economy, more so on developing nations like India.

Among all the major nations, both developed and developing, India is perhaps the most dependent on foreign fuels. And, along with economic expansion and population growth, this dependency is increasing steadily. India’s growing dependency on foreign fuels amid high commodity prices has also eroded the value of the rupee, sending it below 80 to a dollar on Monday, a record low. The war in Ukraine and other global geopolitical developments threaten to render India even more susceptible to frequent and uncertain price shocks. This is the new normal, and New Delhi is yet to announce a comprehensive and detailed policy across the energy spectrum to tackle the security crisis.

India cannot “avoid” price shocks, just like the rest of the world. “Shocks were created by the incompetence of the Western alliance in their sanctions on Russia plus years of underinvestment in oil and gas by western companies, forced by anti-fossil fuel governments and lobbies in the West,” said Tilak K Doshi, an industry expert, with over 20 years of professional experience in Unocal, Saudi Aramco and KAPSARC.

An immediate takeaway from the price shocks, and an ominous sign of things to come, is a major dent to India’s evolving energy transition ambitions, focused on gas and new energy. New gas infrastructure is predicated on increasing gas use and liquefied natural gas (LNG) imports. But after investing Rs 2 trillion-3 trillion in city gas infrastructure and generators to accommodate a more than doubling of gas in the energy mix to 15 per cent by 2030, investors are witnessing a decline in imports of the chilled fuel, and of gas use. LNG imports declined for the seventh consecutive month in July from a year earlier, and seem set for a third year of decline. July LNG imports at $1.2 billion were $200 million higher from a year earlier, when Indian importers secured more fuel for a cheaper amount. Gas consumption declined by 2 per cent in the April-July period.

Renewables and electric vehicle batteries are also hostage to the availability of critical raw materials, and rising rates of lithium and polysilicon. India is primarily investing in downstream processing. That’s a bit like building oil refineries and counting on Saudi Arabia and Iraq for cheap crude.

The International Energy Agency expects India’s oil demand to rise to 7.1 million barrels per day (b/d) by 2030 from 5 million b/d in pre-Covid 2019, leading to net dependence on imports of 91 per cent by 2030. “India is going to have a demand requirement across fuels as long as the economy grows, and the economy is likely to continue growing,” said R Ramachandran, an oil industry consultant and former refinery head of Bharat Petroleum Corporation Ltd. “The growth rate of oil will come down but there will be no degrowth in oil until 2050,” he added.

A flip side to a growing Indian economy, essential to lift people out of poverty, is weakening energy security. India depended on foreign oil for 86.4 per cent of its needs in the April-July period, according to the oil ministry. The reliance on imported LNG fell to 47 per cent during the period from 50 per cent a year earlier only because overseas purchases and demand for the fuel declined on account of record rates. Sixty-three per cent of liquefied petroleum gas, the fuel used in Indian kitchens, was imported. India relied on Indonesia and South Africa, among others, for a fifth of coal, at around 209 million tonnes, consumed last fiscal. April-May purchases alone totalled 40 million tonnes, according to the coal ministry, as generators scrambled to import amid blackouts and power cuts this summer. Also, India imports nearly all of its cells, building blocks for batteries, and solar modules, government data show.

Now let’s look at what this energy dependency does to India’s overall fiscal position, and its currency. The imported value of oil and gas surged over 80 per cent in April-July from a year earlier, primarily due to high fuel rates, to nearly $79 billion, or 31 per cent of India’s total imports by value, according to calculations based on commerce ministry data. That sent the trade deficit to over $100 billion and the rupee to its lowest against the dollar this year. The Reserve Bank of India’s effort to prop up the currency has in turn whittled away dollar reserves.

The trade deficit would have been higher if exports of oil products had not provided a lifeline. Petroleum product exports, led by sales of diesel and petrol from refineries operated by Reliance Industries and Nayara Energy, doubled in April-July to $23.6 billion, or 15 per cent of India’s gross exports, according to oil ministry data. Europe’s reduced reliance on Russian oil products enabled higher sales from India. That number would have been higher if the government had not introduced a constantly changing export levy in the form of a windfall tax.

Geology is an issue for India. “India, like much of Asia, is poor in fossil fuel resources. However, this is made worse by having onerous policies on upstream investment for foreign enterprises,” Doshi said. The constantly varying new windfall tax on oil production is one such policy measure.

New Delhi has only itself to blame for inadequate attention to oil exploration and strategic storage facilities for oil and gas. India’s uneven upstream policy framework and bureaucracy has kept well-known oil companies away from India, an industry official said. Oil and Natural Gas Commission, India’s biggest oil producer, is yet to get a permanent head, faces constant interference from the government on investment decisions, and constant demands on its cash reserves, an official added. The government has delayed for years renewing a licence for Vedanta’s Barmer area in Rajasthan. Crude production will double in three years as soon as the production sharing contract gets extended, Anil Agarwal, chairman of Vedanta, India’s second biggest oil producer, has said.

As Doshi said, “Cut red tape, get the government out of the private sector, and let real competitive business flourish.” But even when that happens, India will struggle to enhance its energy security significantly.