How India extricated itself from an energy squeeze
New Delhi unexpectedly emerged relatively unscathed from this year's oil price volatility, currency fluctuations and geopolitical tensions
India experienced a combination of external pressures in 2018. These included the rise in global oil prices which pushed up retail prices of gasoline in the country by around 9pc between mid-August and early October, a weakening of the rupee, and US pressure to cut crude oil imports from Iran, which comprise around 13pc of total oil imports, ahead of the re-imposition of sanctions.
India arguably emerged from these none the worse for wear. The government, facing the prospect of unhappy consumers ahead of a general election in 2019, intervened to cut excise duties by 1.5 rupees ($0.02) a litre. It also asked state refiners to reduce their margins by 1 rupee a litre. Following this, the softening of global oil prices in late 2018 almost entirely reversed the retail price increase. Although the growing demand for oil has tended to fluctuate with changes in the oil price, it is is currently underpinned by economic expansion, including massive government-funded programmes of road building and extending access to petroleum products such as LPG in rural areas.
This was reflected in a rebound of demand at roughly 234,000 bl/d in the year to September 2018, compared with roughly 51,000 bl/d to September 2017. The country consumes around 4.8mn bl/d, of which roughly 80pc is imported. Looking ahead to 2035, India's demand for oil is expected to account for around one third of global growth.
The 2019 general election is unlikely to alter energy policy significantly. Driven by fiscal concerns, the Modi government in 2015 set a target to reduce oil (and gas) imports by 10pc by 2022, and 50pc by 2030. And so far it remains focused on pursuing this goal. The pressures experienced in 2018 will accelerate government efforts to secure access to diverse supply sources that can meet rising energy demand while mitigating the fiscal impacts of any future potential supply disruptions. This is specifically with a view to keeping the fiscal deficit within 3.3pc of GDP.
This is why, despite having reportedly secured a waiver from US sanctions on Iran, India has simultaneously ramped up efforts to attract international investment in upstream exploration. Contracts for a second round of bidding under its two flagship policies— entitled "Discovered Small Fields" and "Open Acreage Licensing"—will be signed in 2019, with a third round also planned. The country is also seeking private investments to develop the second phase of its Strategic Petroleum Reserve (SPR) for oil.
When this is completed, it is expected to amount to 11.8mn tonnes (87mn boe) in total, and is likely to be expanded further. India's importance as a future driver of global energy demand has also garnered interest from oil exporters looking to secure markets for their supplies, as illustrated by the $44bn investment in a 1.2mn bl/d refinery involving Saudi Aramco, Adnoc and three Indian state refiners. This fits in with plans to nearly double refining capacity in order to meet an expected increase in demand to 2030. Other global energy majors are similarly likely to enter the Indian downstream market in 2019.
India has perhaps most visibly demonstrated its residual bargaining power in the gas sector, shifting its strategy over the last two years towards cultivating more flexible access to LNG imports. Successful renegotiations involving price, delivery dates and volumes in three major long-term LNG contracts with RasGas, ExxonMobil and Gazprom reflect this shift. Efforts are also likely to continue in 2019 to commercialise the use of gas more widely in the Indian economy, thus with limited success.
The surge in LNG imports in India over 2015-2017, rising from roughly 20-30pc of total gas consumption to nearly 50pc, was largely driven by the industrial sector which consumed around 50pc of the total. Yet, total annual gas consumption of just over 50bn cm represents a relatively small quantity in global terms and India remains a wildcard in terms of its future contribution to global gas demand. The latter will depend on two key factors - the price competitiveness of gas in the Indian economy relative to competing fuels such as coal and naphtha, and the development of infrastructure and a clear regulatory framework.
There is likely to be some progress in 2019 on both fronts. Prices for gas produced from specified under-explored "difficult" deep-water fields are linked to a weighted average of substitutes including coal and naphtha, set at $7.67mn btu for the period September 2018 to March 2019), more closely reflecting the prices of fuels that gas is meant to be replacing in the domestic economy.
Plans to set up a gas trading hub in the country to aid a government target of increasing gas's share in the energy mix to 15pc by 2030, from 6.5pc at present, is forcing authorities to look at the current regulatory framework related to competition and third-party access. They are also looking at the restructuring of state gas company GAIL into separate marketing and transportation (pipeline) businesses.
Despite the role that fossil fuels are expected to continue to play in India's future economic trajectory, the country has already embarked on an ambitious transition towards clean energy. Its leadership on renewable energy, targeting the addition of 175 gigawatts of renewable capacity by 2022, was acknowledged in a 2018 study in Nature Communications. This assessed the relationship between national ambitions to cut emissions and the temperature rise that would result if the world followed India's example.
The study showed that India's policies put it on track to outperform its COP21 commitments, with a target only slightly off course. The expectation is that a large proportion of the 175 gigawatt target will be achieved - Wood Mackenzie for instance puts it at 76pc. India has had stellar success with its renewable auctions, with record low tariffs continuing in 2018 priced at 2.44 rupees or roughly $0.035 per kilowatt hour.
The effects of this capacity expansion are beginning to show up in electricity generation. In August 2018, renewables (mainly wind) contributed a record 13.4pc to electricity generation, representing a year-on-year increase of just over 50pc. This also highlights the next set of bottlenecks that the country must resolve in order to truly effect a transition to sustainable energy - the ability of the power system to cope with renewable intermittency, correcting distortions in the pricing system, and demand-side management.
In 2019, we should see developments related to an amendment of India's Electricity Act to separate distribution and retail supply, permit competition in the latter, and phase out electricity cross-subsidies from the pricing system. Instead subsidies would be provided through "direct benefit transfers" to eligible consumers. Faced with increasing pressure to combat urban air pollution, given that India hosts 11 of the world's 20 most polluted cities, a national strategy for the adoption of electric mobility is also in the offing, despite the scaling down of the government's ambitions for electric vehicles to 30pc of India's total fleet by 2030, as opposed to the entire fleet.
The building out of charging infrastructure is seen as the key to this strategy and the government appears to be aiming for a mix of provision through public investments and private entrepreneurship. Some state electricity regulatory commissions have already announced plans for time-of-day tariffs for EV charging. However the pace of progress or transformation in this context will be determined by whether -- and how quickly -- political, financial and technical constraints can be resolved in the implementation process. Another factor is whether a consolidated approach will be adopted as opposed to ad hoc solutions.
The ball is in India's court in 2019 as the government continues to follow a three-pronged energy strategy. It will negotiate access to oil and gas imports on flexible terms wherever possible. It will ramp up efforts to attract private investment across the supply chain to boost domestic energy production and meet short to medium-term demand. And it will continue the transition to competitively priced clean energy in the medium to long-term.
Anupama Sen is Senior Research Fellow at the Oxford Institute for Energy Studies