COMPACT is expected to increase bilateral trade from USD150 billion in 2025 to USD 500 billion by 2030. Energy sector is the key driving force to achieve this ambitious target.
India-US energy relationship is expected to evolve from a traditional buyer-seller model into a strategic partnership to ensure technology transfer and energy security.
While it is beneficial for both the countries to have an ambitious target, India needs to pay more than the usual attention while signing long term bilateral contracts to buy LNG, LPG and crude oil. What may look like beneficial today may turn out to be costly later when circumstances change.
Just having suffered the third oil shock with the historically largest drop in oil supplies, India’s priorities and needs for energy security may be shaped by the current crisis. All these three major oil shocks are black swan type of events.
Each time, the characteristics and factors behind these oil shocks differ. While lessons can be learnt from each crisis, it is not necessary nor advisable to formulate our policy to future crisis by extrapolating them.
As part of COMPACT, there were segments on energy security collaboration, to recommit to the US-India Energy Security Partnership.
Since the US oil demand for oil will likely reduce and so also its need to store Strategic Petroleum Reserves, India may be able take advantage of this. India can either store its SPR in the US itself at less cost or even get assurance from the US to meet its oil needs under emergency without storing.
Such a strategy will save India a great deal of investment. Of course there is certain amount of risk in case the US changes its assurance as has happened in recent years specially under Trump. By using the best legal advice, contracts can be developed both to give enough flexibility and mitigate any possible risk.
In the case of SPR, India needs to think seriously about the need to invest a large amount of money to meet the IEA suggested requirement of SPR to meet 90 days of imports. Even under the current crisis when the world lost about 10 to 12 million barrels per day the largest loss oil supply, India did not face any problem of meeting crude oil import needs. India has ensured oil import security by diversifying its sources and the need for 90 days of imports is highly questionable.
There are substantial opportunities for US investment across India’s hydrocarbon ecosystem. India should encourage US companies to invest in upstream exploration and production, and LNG infrastructure where the US expertise can add maximum value.
Let us learn from the experience of Guyana where the US company ExxonMobil has found enormous amount of oil reserves (over 11 billion barrels- In contrast India’s recoverable oil reserves are just five billion barrels which is equal to about 2.5 years of annual demand) in 2015.
The world had started to plan for Peak Demand. And Shell oil had even departed after failing to discover oil.
Gayana’s terms were attractive to the companies to take huge risks. The production and revenue sharing agreements allowed the oil companies to use 75 per cent of revenue from exploration to cover their costs in full. The remaining 25 per cent is split in half.
India has attempted over the years to attract US Companies and has failed. Perhaps, as part of COMPACT, US oil companies may feel more encouraged and also India may consider giving much better terms while awarding exploration contracts to attract the US Oil companies. This should be a win-win situation.
India should appreciate the tremendous risk oil companies take while exploring in a country like India where success of finding has not been all that high.
According to IEA, over the next 10 years, India will account for approximately half of global oil demand growth. For this reason, the US is keen to expand its oil trading opportunities in India.
However if there are no crisis like the current crisis, oil purchases by Indian oil companies will be mostly guarded by market conditions and not any trade agreements. However for commodities like LNG and LPG, trading in those products on long term basis can be encouraged. There should be mutually agreeable trade agreements allowing for enough flexibility to reflect changing market conditions.
Often the long distance and transit time between the US and India is given as the reason for not encouraging crude oil trading.
This is not the true reason. India is keen to import crude oil from Venezuela a country which is also far away. This is despite fact that Venezuelan oil being extra heavy and sour. Venezuelan crude oil is preferred because of its attractive price which is discounted heavily from the bench mark WTI or Brent. It gives good profit for refiners like Reliance since they have the right kind of refinery infrastructure to process such heavy and sour crude oil.
Again importing crude oil from the US under the right market conditions give diversification which has its own merits during the crisis. For this reason, India has been importing from several countries as a policy of diversification but without incurring any additional cost.
To get the most out of the agreement between PM Modi and US President Trump, India should form a separate task force for petroleum and natural gas sector headed by the Petroleum Minister consisting of advisors with rich experience in exploration, production, oil and gas marketing and economics to develop a sound strategic plan. Otherwise the goal of USD 500 billions will remain only as aspirational.
(The author has over 50 years of experience in international oil industry and served as a member on the Exploration Advisory Committee to ONGC).