What will be the impact of the Ukrainian crisis on India’s energy sector? What lessons should it draw from the playbook of the crisis? What policies must it frame to safeguard its national energy interests? These are the questions that this article will address. The focus will be on energy.
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The tangible and unavoidable impact of the crisis will be on India’s macro-economy. Sajjid Chinoy has, last week, summarised well the balance of payments, exchange rate and inflationary consequences of rising oil prices (‘Crude Pressures’, IE March 4). I want to add that the inflation-adjusted price of Brent crude is $83/bbl (as of writing, the nominal price is $116 / bbl), which is lower than the peak of $145/ bbl in 2008 and the average price that year of $100/bbl. In other words, prices could rise much further and we would still not be in uncharted waters. Further, there are manifold uncertainties. The price trajectory will depend on the duration of the conflict, its impact on global energy demand, countervailing supply measures (for example, drawdown of strategic reserves, diversion of US LNG supplies to Europe, the Iranian nuclear deal which, if signed, could release up to 1 mbd of Iranian crude into the market) and whether in all this mayhem, the pipeline infrastructure currently feeding Russian gas into Europe remains operational. One cannot discount the possibility of a wayward missile disrupting supplies. Let me also add that our earnings from petroleum products (diesel, petrol, naphtha) will be adversely impacted. In 2021, these products generated $39 billion in revenue and at 14 per cent, they accounted for the highest share of export earnings.
A still difficult to quantify impact will be on the value of India’s energy assets in Russia. ONGC has a 26 per cent stake in the Vankor oil field, a 20 per cent stake in the Sakhalin-1 LNG/oil export complex and maybe a few other less valuable interests. All these holdings have eroded substantially in value. Many Western majors (Exxon/ BP/Shell) have walked away from their investments. ONGC has that option too, as also the opportunity to increase its shareholding on the cheap. It will not do the former and it would be opportunistic and morally wrong to do the latter. So, for the present perhaps, it should do no more than making provisions for a write-down. In India, Rosneft (the Russian national oil company) operates the 20 mtpa refinery in Vadinar through Nayara Energy. Nayara is not sanctioned but the traders of crude/products might worry about transacting with an Indian company owned by a sanctioned Russian entity.
India will also be affected by the emergent energy landscape. Four features define this landscape.
One, the tightening energy embrace of Russia and China. Only last week, for instance, Gazprom signed off on an agreement to build a second gas pipeline to China christened “Power of Siberia 2”. The “Power of Siberia 1” pipeline has been pumping gas into China since 2019.
Two, the emergence of the US as the largest producer of oil in the world and potentially the largest exporter of LNG. It has the capacity to blunt the impact of a supply shortfall but as it is controlled by profit-maximising private corporates, this will depend on market forces. Supplies will head towards the highest bidder.
Three, the ability of Saudi Arabia to swing the crude oil market. It is the one member of OPEC plus with significant spares, low cost, producible capacity (approx 3 mbd) of crude oil. The US has pressured Saudi to bring this volume into the market but they have, as yet, not buckled.
And finally, the chokehold of China over the rare earths, minerals and components that are required to effect the transition to a clean energy system.
India will have to navigate the consequential (and conflicting) geopolitics generated by these four features.
The final impact will be on the petroleum industry. Ahead of the current state elections, the government disallowed the oil marketing companies (OMC) from passing on the rise in prices to the consumer. If this ban continues, the OMCs will be financially crippled and plans to privatise BPCL will come a cropper.
The Ukraine crisis throws up many learnings. But one needs particular emphasis. It is not enough to read the tea leaves of supply, demand and geopolitical trends to understand the trajectory of the energy market. It is comparably important to understand the mindsets of the autocrats that hold the levers of energy policy. Three individuals, in particular, must be carefully studied. President Putin, Crown Prince Mohammed Bin Salman (MBS) and President Xi Jinping. These three exercise plenipotentiary powers over energy policy in their country and the hydrocarbon market has been witness to the consequences of their “irrationality” twice in two years. In Q1 2020, the oil market went into free fall because MBS was determined to protect Saudi’s market share, and increased supplies, despite the Covid-induced collapse in demand. The result was so dramatic that on one day in April, the holders of crude futures had to “pay” to offload their holdings. The price of oil was in negative territory. President Putin has today driven an equally “irrational” wedge into the market with comparably severe but opposite ramifications.
The lesson: One must presume the word “ rational” does not have the same meaning for these leaders as for those who derive its interpretation from the Oxford dictionary. And that to understand what it means for them, one must interpret it through the prism of their personal predilections, egos and political ambitions.
Against this backdrop, I offer five broad policy suggestions for India. One, frame it around the expectation of continuing volatility. Two, build up strategic reserves to safeguard against the unexpected. Three, revive conversations with Turkmenistan and Iran about a transnational gas pipeline. Four, fast forward efforts to decouple the supply chain dependence on China for the minerals and components required for the clean energy transition. And, finally bring in psychologists to get a better fix on the logic that drives the decisions of the energy autocrats.
The writer is chairman and distinguished fellow, Center for Social and Economic Progress