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Anachronism of Asian premium

It is a welcome breakthrough, commencing import of petroleum crude and natural gas from the US. The first consignment of American crude oil is expected to reach Odisha in the last week of September.

Anachronism of Asian premium

Indian Oil Corporation and Bharat Petroleum had placed initial orders for two million barrels of crude from American shale oil producers in Texas. To be followed soon by Hindustan Petroleum, oil imports from the US are expected in the region of $ 2 billion.

The skilful negotiation of Prime Minister Narendra Modi with US president Barak Obama in December 2015 and subsequently with President Donald Trump have resulted in this US deal. It is gathered that the price compared favourably with other import contracts with OPEC countries. 

This development should be welcomed on several grounds. OPEC producers have been levying an Asian premium on oil supplies to Asian countries. Despite the fact that China, India and Japan are very large importers of crude from OPEC, the historical anachronism of this premium has been continuing. Developing America as an alternate source can help end this. Already China, Japan and South Korea have been importing crude and LNG from the US.

Unlike with OPEC countries, India’s trade balance with the US has been highly favourable to India. Such new avenues for imports from the US in large volumes would help reduce the trade imbalance. Apart from crude, Indian companies have also contracted 9 MMTPA of LNG from the US. With the rapid increase of LNG consumption, such contracts on current favourable prices should be especially welcome.

 

America’s race to self-sufficiency in vying

America’s emergence as a sizeable exporter of crude and natural gas has invaluable lessons for India. Over a decade ago, the US, worried over the massive outgo on imports of petroleum products set on a course of developing domestic production of these. It provided special incentives for the production of shale gas and shale oil. Technologies were perfected for producing gas and oil from shales. The big increase in international prices that exceeded $100 per barrel of crude was a big help. Even while crude prices ruled, high American scientists succeeded in reducing production cost. 

Simultaneously the US focused on producing oil from corn. This helped in two ways. The huge production of corn was sustained by exports; these suffered while several other competing countries in South America also emerged as large producers of corn. Significantly, these countries were helped by American companies and by American production techniques. The advantage of producing ethanol to power automobiles was encouraged and incentivised. This retrieved the sagging fortunes of corn producers. Combined with efforts to expand production from conventional sources in Texas, Alaska … the US raced towards self-sufficiency and emerged an exporter, all happening in a short span of a decade! 

 

Vital lessons for India

There were vital lessons for India to set up such goals over the long term and reach it through appropriate policies. Surprisingly, despite estimates of the good potential for producing oil and gas from shale, India has not been looking at this source. Four Indian companies have invested around $5 billion for purchasing shale assets in the US. The knowledge gained in this area should be helpful in using the technology for developing shale oil/gas production in the country.

The great promise of producing natural gas off the KG basin has suffered by policy deficiencies. Reliance Industries that raced to produce over 60 msmcmd during 2009-10, reduced production initially due to uneconomic pricing. It has fallen to less than 10 msmcmd today. The promise made by the then minister of P&NG, Murli Deora of gas production reaching 200 msmcmd has also not been realised due to the tough economic conditions post-2009.

Likewise, despite India emerging the second largest producer of sugarcane the potential to step up production of ethanol from sugarcane molasses has not been realised again due to policy deficiencies. 

There is an imperative to address this question in the light of the import dependency of petroleum products: it was 80.9 per cent during 2015-16, petroleum imports accounted for as high as 27.9 per cent of India’s gross value of imports during 2014-15; it dropped to 19.4 per cent during 2015-16 thanks to the steep fall in the price of crude oil. During 2015-16, India imported 232.3 mn tonnes of petroleum products valued $73.9 bn. 

Trade develops stronger bond than political ideologies. Thus, the breakthrough in contracting oil and gas imports from the US should help in stronger trade ties with the US.

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