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Good news and bad for India

India is taking two steps forward, one back in its quest for energy independence

The discovery in September of two new fields by India's Oil and Natural Gas Corp (ONGC) marks a step forward in the country's problematic strategy of energy independence, just as it faces up to the high cost of renewed sanctions against Iran.

The finds—in Madhya Pradesh's Vindhyan block in central India and at Ashoknagar in West Bengal, eastern India—could bring the total of producing sedimentary basins in the country to eight.

These latest discoveries follow one made by ONGC in early 2018, in the Gulf of Kutch off the West Coast that's due to start pumping oil around 2020. Even better for the country's drive for energy independence, ONGC estimates that the Kutch field could hold 1 trillion cubic feet of gas at manageable maximum depths of 200 metres.

Iran influence

That's the good news. The bad news is that president Trump's repudiation of the anti-nuclear treaty with Iran could hit India hard. That's because compliance with the resumption of sanctions means India will have to replace imports of Iranian crude with more expensive supplies from Saudi Arabia. According to estimates by Clarus Law's energy specialists, the cumulative cost to India will be about $1bn for every $1 increase in the price of a barrel of imported crude.

Currently, India buys about 10.4% of its crude imports from Iran, mainly through Bharat Petroleum, Hindustan Petroleum, Indian Oil, Reliance and Gail, formerly known as Gas Authority of India. But what choice do these importers have? If any non-US company continues to deal with Iran, they'll be hit with secondary sanctions that are due to apply from 4 November 2018.

As it stands, the ripping up of the treaty does nothing for prime minister Narendra Modi's grand plan to reduce the cost of oil imports as he aims for a 10% reduction in imports by 2022.

Out of gas

The Modi government is also battling with the financial mess it inherited in gas-based power infrastructure that, if it's not fixed, will hurt plans for cleaner energy. Of India's total 27.123 gigawatts capacity in gas-fired generation, nearly half has officially been designated as "stranded", meaning idle. That's because these plants, most of which were built on the back of government policy that prevailed until 2012, are still waiting for supplies of domestic gas. Financial white elephants, they are weighed down by 48,000 crore ($6.5bn) in debt, which may have to be written off, according Clarus Law's energy infrastructure specialist Piyush Joshi.

"There is increasing clamour to send the stranded gas-based capacity through the shredder process of the Insolvency and Bankruptcy Code," he notes in a paper released in September.

Generally, domestic gas production has been disappointing. While output rose by 4.5% in 2017, according to BP's latest statistical review, it had fallen for six straight years, and the latest increase only restores production to 2006 levels.

Saudi deal

In the meantime, India's oil needs continue to rise inexorably. According to consultancy Wood Mackenzie, refined product demand is expected to rise by 120,000 barrels a day for the next five years. This is more than twice as fast as the extra 45,000 b/d that the big public-sector energy companies are predicted to deliver over the same period under current expansion plans. Unless private refiners such as Reliance and Essar can come to the rescue, the public sector would need to add between 150,000 and 200,000 b/d just to maintain self-sufficiency in transport fuels between 2025 and 2035.

"Because of the under-investment, [these companies] will see their combined gasoline and middle distillate deficits rising to 630,000 b/d by 2023," concludes Wood Mackenzie. "If India is to be self-sufficient, the need for new capacity to meet the growing demand in the longer term is clear."

This is why India desperately needs a projected $44bn project planned with Saudi Aramco. At a capacity of 1.2m b/d, the Ratnagiri-based refinery and petrochemicals complex should help plug both fuel and petrochemical feedstock gaps.

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