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Crude production in India has grown at 1 per cent annually since 1990. The pain of import reliance has grown as the rupee weakens. Brent Lewin / Bloomberg News
Crude production in India has grown at 1 per cent annually since 1990. The pain of import reliance has grown as the rupee weakens. Brent Lewin / Bloomberg News

Pain only increases for India as prices soar and rupee plummets

At a time when global crude oil prices are soaring in the face of a possible US-led strike on Syria and the rupee continues its slide, India's huge dependence on oil imports is starting to bite.

NEW DELHI // At a time when global crude oil prices are soaring in the face of a possible US-led strike on Syria and the rupee continues its slippery slide, India's huge dependence on oil imports is starting to bite.

India, in 2011, was the fourth-largest energy consumer in the world after the United States, China and Russia, according to the latest data available from the US Energy Information Administration (EIA).

Most of this consumption is fuelled by imports, making it also the fourth-largest importer of oil and petroleum products, says the EIA.

India had proven oil reserves of 5.5 billion barrels at the end of last year, according to the Oil & Gas Journal. Of these, about 53 per cent of reserves are from onshore resources, while 47 per cent are offshore reserves. Most reserves are found in the western part of India, particularly offshore Gujarat and in Rajasthan.

Domestic crude production has been growing at just 1 per cent annually since 1990, says the EIA. As a result, India imports four fifths of its oil needs, a major factor in the country's huge current account deficit.

A US$1 per barrel change in crude oil price impacts India's trade balance and current account by about $1.1 billion, says a report last month on India's energy sector by Mumbai-based Kotak Institutional Equities, a division of Kotak Securities.

With insufficient assets of its own, New Delhi has chosen to fill the gap via imports rather than focusing on acquiring energy assets from others.

In a report in December 2005 on India's integrated energy policy, the state planning commission, which lays out a five-year road map for the country, said, "Obtaining equity oil abroad does not particularly increase oil security against supply risk. The political risk of disruption of equity oil through embargoes or nationalisation etc would be similar to risk entailed in oil import from the same country.

"If the amount of money invested in obtaining equity oil were to obtain a higher return in an alternate investment, that would provide a better level of comfort against future increase in oil prices," it added.

Keeping that philosophy in mind, state-owned Indian energy companies have not been very aggressive in acquiring assets abroad, unlike their Chinese peers. Between 2009 and May, three state-owned Chinese companies have bought or invested in 21 energy companies across the world including in Australia, Canada, Kazakhstan, Uganda and the US, among others. On the other hand, Indian companies invested in eight companies - of which, three deals were done by the billionaire Mukesh Ambani-owned Reliance Industries - during that period, Kotak says.

With India's current account deficit at $87.8bn in the year 2012 to 2013, or 4.8 per cent of the GDP, according to the Reserve Bank of India, it may be time for New Delhi to rethink those half-hearted policies.

Sanjeev Prasad, the senior executive director and co-head of Kotak, in a report says India's policy debate needs to shift towards achieving "enhancement of domestic energy security and an integrated approach to acquisition of global assets. India's current muddled approach will likely lead to further dependence on energy imports and weaker Indian companies who will be unable to compete globally. The companies have already been enfeebled by populist politics (subsidies, pricing)."

Indian consumers get oil at subsidised rates. The burden of subsidies is borne by upstream and downstream marketing companies. The government is supposed to make up to these companies the difference - known as under recoveries - in price, a practice that has curbed any interest by foreign firms in the sector.

For the quarter ending on June 30, earnings of downstream oil companies experience a cumulative net under-recovery of about $400 million and large foreign exchange-related losses of about $1bn.

This subsidy system has weakened the balance sheets of Indian companies, making them relatively weaker in comparison to their global peers as well as leaving them vulnerable to meeting the energy requirements of the country, Mr Prasad said.

To be sure, the Indian government has gradually reduced fuel subsidies this year. But the impact of those cuts has been limited because of the rupee's sharp fall, from 55 rupees per dollar at the end of May to anywhere between 66 and 68 in the first week of September.

There is not much India can do in the short term to improve its finances and reduce its dependence on imported fuels.

At best, it can reduce consumption to make a dent in its import bill, a highly unlikely event.

Its only - short term, to be clear - hope lies with Iran. India imports crude oil from Iran and pays for it in rupees. But the quantity of imports have to be limited, partly to not violate US trade sanctions, which say countries need to continuously decrease their imports from Iran, and also because Iran has a limited appetite, and need, for Indian rupees.

"We're in trouble and it won't be solved overnight," says an India analyst who did not want to be named.

Perhaps such coyness is no surprise.



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