Liberalisation of Indian Economy & Its Impact On Indian Oil & Gas Sector.
For four decades following Independence , the Indian economy was under a socialist, dirigiste leash. The laws of demand and supply took a backseat to the diktats of faceless bureaucrats.
Unsurprisingly, the economy could only crawl along, plagued by high rates of inflation, unemployment and inefficiency - the consistently meagre rates of growth produced by it coming to be contemptuously termed the "Hindu rate of growth" the world over.
The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade — a belief generated by a mixture of socialism and the experience of colonial exploitation.
The problems steadily mounted and in 1991, the economy stood on the verge of collapse due to an acute foreign exchange shortage crisis.
In 1991, after the International Monetary Fund (IMF) had bailed out the bankrupt state, the government of P.V. NarasimhaRao and his finance minister Manmohan Singh started breakthrough reforms.
The new policies included opening for international trade and investment, deregulation, initiation of privatisation, tax reforms, and inflation-controlling measures.
Various agencies within Indian government oversee energy policy in India and include the Ministry of Petroleum and Natural Gas, the Ministry of Coal, the Ministry of Non-Conventional Energy Sources, the Ministry of Environment and Forests, the Department of Atomic Energy, and the Ministry of Power.
Under the Ministry of Petroleum and Natural Gas are the Directorate General of Hydrocarbons (DGH) and the Oil Coordination Committee.
The DGH was set up in 1993 to oversee petroleum exploration programs, develop plans for the state-owned oil enterprises and private companies, and oversee efficient utilization of gas fields.
The Oil Coordination Committee oversees, plans, regulates, and advises on the downstream sector.
The Gas Authority of India Limited (GAIL) is responsible for transportation and marketing of natural gas.
State-owned companies like the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), which manage exploration and production activities, and the Indian Oil Corporation (IOC), which secures oil from abroad, also help shape the direction of energy policy.
Lack of a comprehensive energy policy is a barrier to foreign investment in long-term energy projects in India.
To address the absence of a policy, the government released in early 2000 Hydrocarbon Vision 2025, a study whose recommendations may become official policy.
The study suggests, among other things, that India revise foreign ownership regulations for refinery operations to allow 100% foreign ownership.
The study calls for elimination of government subsidies for petroleum over the course of the next 3-5 years.
The government is being encouraged to allow domestic gas prices to float to international levels which would affect the 25% of the gas market that is protected by government price controls.
Furthermore, the study set down a goal to supply 90% of India’s petroleum and diesel needs from domestic sources.
India suffers from low drilling recovery rates. Recovery rates in Indian fields average only about 30%, well below the world average. The government hopes one of the benefits to opening up the energy industry to foreign companies will be access to better technology which will help improve recovery rates.
Wary of a growing reliance on imported oil, the government announced the New Exploration Licensing Policy (NELP) in 1997, which opened the door to involvement by foreign energy companies.
Foreign firms were initially hesitant to bid on oil exploration rights, and as a result no bids were received from foreign energy companies in 1999. However, by early 2000 India had awarded 25 oil exploration blocks. The largest contract went to Reliance Industries of India, which together with Niko Resources of Canada, won 12 oil exploration blocks.
Additionally, the government is encouraging Indian energy companies to get involved in exploration and production projects in other Asian countries to make them more competitive in the international arena and develop their technical prowess.
Indian companies have become active in other oil projects in Asia, Sudan, Australia, and Russia. In early 1999, IOC and ONGC formed a strategic alliance designed to improve the international competitiveness of both firms.
India is becoming a major global market for petroleum products. Consumption of petroleum products rose from 57 million tons in 1991-1992 to 107 million tons in 2000.
The India Hydrocarbon Vision 2025 report estimates future refinery demand at 368 million tons by 2025.
For India to meet its ambitious refinery expansion goals it will need help from multinationals and private Indian companies.
The main focus of a liberalization program that began in the mid-nineties has been greater access to the refinery sector for private companies and a green light for joint ventures with state-run enterprises.
One approach has been tax breaks such as granting plants completed by 2003 a five-year tax holiday.
Regulatory reform has entered into the picture, allowing foreign firms that invest in excess of $400 million in refinery operations to sell refined products.
Natural gas now supplies about 7% of India's energy. Consumption of natural gas rose from 628 billion cubic feet (bcf) per year in 1995, to 752 bcf in 1999. Power generation, fertilizers, and petrochemicals production are industries that have been turning to natural gas as an energy feedstock. Natural gas will become a bigger part of the energy picture for India, primarily as a way to reduce dependence on foreign oil.
Today, the booming economy, declining unemployment and poverty rates, and all-round increase in the nation's prosperity bear testimony to the wisdom of that momentous decision.
But the most satisfying facet of this turnaround nevertheless remains emotional - the stupendous rates of growth currently displayed by the Indian economy being admiringly termed the "new Hindu rate of growth".