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ASSOCHAM

Ashok Dhar- (Fellow of Energy Institute, London. He served as an expert member of Auto Fuel Policy & Vision 2025 committee of Planning Commission. Currently, he is Principal Consultant and Director of Akarosi Ltd (www.akarosi.com), a consulting and advisory company in Energy sector. )  

Oil price current scenario – Good or bad for India Consumers always feel happy when oil prices are low but often forget low oil price regimes when oil prices return to market determined higher levels !  

Prima facie, low oil prices are good for India as we are heavily dependent on imports. About 80% of our crude oil requirement is met  through imports and a lower price by $1 per barrel can reduce our foreign exchange outgo by about Rs 2600 to 3000 crores, depending on prevailing exchange rate and overall refinery crude mix. During 2019-20, our crude oil import is likely to be around 226 MMT with an outgo of about $ 103 billion. Hence, lower price of crude oil and NG have a positive impact on our current account deficit and helps moderate inflation.  

Taking advantage of low import prices, Government of India has taken a prudent step on March 14 to raise excise duty on Petrol and Diesel by Rs 3 per litre and generate revenue of about Rs 39,000 crores this year for recovery of economic activity by investment in infrastructure sector.

The current oil price scenario, especially the sharp downturn, is different than ever previously experienced.  Covid 19 has affected global economic output, disrupted supply chains and killed demand for fuels, especially in major sectors like road transportation, aviation, chemicals and petrochemicals. Unlike the last global recession of 2008, India currently faces a crisis of falling GDP and reduced consumption.   

Falling prices and falling demand in tandem are a double whammy of sorts, not experienced thus far. Besides, we receive over $40 billion yearly from expatriates working in the Middle East region, esp in UAE, Saudi Arabia, Kuwait, Oman. As  revenue of these oil producers gets reduced, remittances from our expatriates may be affected as well.   

Even before Covid 19 crisis became a global crisis, oil producers led by OPEC, were battling with low oil prices on account of non agreement between Saudi Arabia and Russia on reducing output of crude oil. Increased level of about 13 million barrels per year of shale oil by USA has also threatened Saudi’s dominance as the largest producer and alleged attempts by Saudi Arabia to lower prices to levels that make shale oil unviable are also helping create an era of continued low price oil environment.

The agreed oil output cut of 1.5 million barrels of oil per day(mbpd) by OPEC and non OPEC producers on March 2, 2020 is valid upto June 6, 2020 but it falls short of the estimated short term drop in demand in April and May. Generally, OPEC meets once in a quarter and next meet is scheduled in June but consultations via video conferencing are underway to devise a strategy to arrest falling prices as various estimates put the drop in demand in short term from 4 to 8 mbpd.

Currently, crude oil stored on-shore is almost near its earlier peak of 3.4 billion barrels. In addition, nearly 90 million barrels are in floating stock, not far from what world had seen in  2009 during the period post Lehman crisis. It is a good opportunity for us to top up Indian crude storage capacity of 5.33 MMT at ISPR caverns in Padur, Vizag and Mangalore as national reserve stock. Overall, bearish factors and sentiment prevails to support a low price environment at least in FY 2020 unless a wild card tripartite agreement between USA, Russia and Saudi Arabia throws a surprise to lift oil prices to mid $40 per barrel or mid $50 or even higher.However, any short term rally may not sustain till global demand increases to previous levels of economic activity.  

While, low crude oil price may be good news for country and consumers, it does not augur well for our upstream producers, like ONGC and may make their operations unviable by incurring cash losses in on- shore oil and gas production. It surely, calls for deferment or relook of royalty and OID cess paid by such producers till prices rebound to help them sustain such payouts. A low price environment should not put a constraint in E&P efforts as we are targeting to make substantial reduction, at least 10%, in our import bill. Any  reduction in capexin E&P sector shall not be in our national interest. Similarly, it may not been an appropriate time to push for divestment of government stake in BPCL and NRL as valuations will be lower. Low price of Petrol and Diesel can also affect thrust on renewable and transition towards electric mobility.  

Nevertheless, low price regimes also present some buyouts of distressed assetsfor those who have risk appetite in E&P and can raise funds for acquisition. It requires market intelligence to spot such deals for M&A and calls for speedand empowerment for due diligence, negotiation and closure. Such low price and challenging environments also provide opportunities for corporates to review cost budgets, debt portfolio, capital expenditure, divestment of non core assets, evaluation of discretionary spends, process efficiency and right sizingof organizations. Based on learnings from lockdown, HR practices may now include working from home, flexible working hours, wellness programmesetc as a norm allowing a new policy for employee mix and talent retention at work places as strategic HR initiatives.  

What goes up, comes down and what is low today may not be low tomorrow. Low and High are all relative terms and part of business cycles. Let us look ahead and work for a path for revival of economy. EIA STEM April 2020 estimates drop in demand of 5.2 mbpd but projects a growth of 6.4 mbpd in 2021, largely driven by revival in India and China. Hopefully, our supply chain linkages should support a revival starting Q2 2020to help put  GDP on a growth trajectory in FY 2021.