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January 24, 2014

Re-energising India

India will have to diversify its energy basket so that it can hedge against global movements and also balance its imports with increase in local production.

The necessities and luxuries in life are chauffeured by energy. It is everywhere, from electricity to cooking food and supplying water to transportation fuels to manufacturing every good and electronic gadget that we use each moment of our life. Yet it is only the absence or a disruption that makes us recognise the importance and source of energy. Energy is the catalyst for growth and better quality of life. With increasing population the demand for energy is ever increasing (though efficiency helps us get more out of every unit). Most forecasts by the industry, World Bank and International agencies predict around 35 percent increase in global energy demand (after factoring energy efficiency gains) over the next three decades as global population reaches circa 9 billion (from 7 billion in 2012) and the global GDP per capita increases by 80 percent.

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This energy increase will be fuelled by electricity demand at both residential and commercial spaces, transportation and industrial use. As per the World Energy Outlook 2013 released by International Energy Agency (IEA), the share of fossil fuels in today’s energy mix is 82 percent which is the same as it was 25 years ago.  The rise of renewables will reduce it to only circa 75 percent in 2035.

Natural gas is expected to be world’s fastest growing major energy source in the next three decades with demand projected to rise nearly 65 percent during this period. By the middle of next decade, it is expected to overtake coal as the second largest energy source behind oil. Much of this increase (almost 65 percent) will be fuelled by Asian markets. While China is the main driver of increasing energy demand in the current decade, India is to take over as the principal source of growth by end of next decade.

As per IEA estimates, India’s energy demand is poised to increase by a compound annual growth rate of  3.1 percent over the next three decades compared to a world average of 1.3 percent. Our current mix is dominated by coal. We have the third largest reserve (2010 estimates as per IEA) and 70 percent of the electricity is generated from coal fired power plants.

PIE CHART 1(Source: US Energy Information Administration Country Report) 

IEA estimates that with current policy frameworks, demand for all fossil fuels (coal, oil and gas) will increase by approximately three times. However, if stringent commitments to reduce carbon emissions are included, the role for gas, nuclear and renewable will be bigger replacing the demand for coal. In all scenarios, the increase in reliance on hydrocarbons (oil and gas) is highest & substantial.

India imported almost 35 percent of its energy requirements in 2010, 81 percent of which was crude oil imports and 21 percent was natural gas. The affordability and security of the resources plays a huge role in the economic growth. India is and will always remain deeply integrated with the global energy market, more so on the buyers side. And hence the inevitable supply and price volatility will have a major impact on our economic growth. The growing dependence on foreign energy resources will also hamper our autonomy and role in global issues such as those ongoing in the Middle East.

Apart from coal, India is not bestowed with huge energy reserves relative to its population. Hence India’s energy basket will have to be a robust and integrated mix of coal, hydrocarbons, nuclear and renewable energy. As per BP’s report “Statistical Review of World Energy 2013”, the reserve to production ratio (the number of years the reserves will last at current production levels)  of proven oil reserves in India is 17.5 years and that of proven natural gas reserves is 33 years. While both are below world average, many of India’s sedimentary basins have not been properly explored for hydrocarbon reserves (the last survey was done two decades back) and hence are not part of proven reserves. Until a few years back, the shale oil and gas reserves in the US were also not part of the proven reserves. With the advancement of technology the global recoverable resources base continues to increase even as the production increases.

Pie chart 2(Source: Natural gas in India by IEA)

The recent claims by the petroleum and national gas ministry to become self reliant in energy by 2030 are ambitious to say the least. Let’s hope the lofty target spurs more action in the right direction. The challenges that plague the energy industry in India are no more novel from those faced by other industries in this country. To begin with an integrated national policy with inputs from different ministries of power, coal, petroleum & natural gas, renewable would be a start. India will have to not only diversify its energy basket so that it can hedge against global movements within the sector but also balance its imports with increase in local production. The political will to implement such a policy and be consistent across governments both Union and the state will be a good second step.

The energy industry is capital intensive, with projects running in many billions of dollars over 20 – 30 year cycles at times. Stable and again consistent regulation will provide the confidence to investors to build the infrastructure and undertake huge risks which a typical exploration campaign carries. The possibility of finding commercial reserves of oil or gas at times can be as low as 10 – 20 percent in a new geological play. A complete geological survey of all the sedimentary basins for conventional and unconventional (shale and tight) reserves will provide the thrust for hydrocarbon exploration. Additionally, seeking the right technology through partnerships with IOCs and NOCs can also help unlock previously inaccessible reserves. And finally, energy supply cannot be taken for granted as was illustrated by the huge power grid failure in 2012. It is a commodity and an appropriate price is required to be paid by the consumer which thus enables investment and builds capacity to produce more energy.

Photo: Max Boschini


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