The Big Oil Bet

How India is making its biggest ever bet on the oil sector…

The big bet on oil should have actually happened in India a long time back. It was always a mug’s game. India consumes nearly 4.4 million barrels of oil per day. Of this it produces just about 25% of its daily oil needs and depends on imports for the balance 75% of its oil needs. Why has this gap suddenly become so important to the Modi government?

Oil demand likely to explode…

India is already among the major consumers of oil in the world. But what India has seen may just be the tip of the iceberg.  According to estimates by the International Energy Agency (IEA), India may be on the threshold of seeing its oil demand explode. The number of vehicles in India has already touched the 20 million mark and is growing at nearly 6% annually. This is going to be the biggest driver for oil demand in the coming years. Over the next 25 years, India is likely to account for nearly 25% of incremental global demand for oil, making it the most important oil market in the world. In the first quarter alone, the demand for oil shot up from 4 million bpd to 4.4 million bpd.

So, it is acquisition time…

India is already planning a massive expansion of its oil capacity both through organic increase in capacity as well as through inorganic acquisitions. Look at some of the recent deals! ONGC, OIL and BPCL already hold 30% in an oilfield in Mozambique. This is touted as the next big reserve in oil. ONGC just completed the purchase of a stake in Russia’s Vankor oilfield for $1.5 billion. OIL, BPCL and IOCL will be taking another 24% stake in the Vankor oil field. India’s investment in oil properties in Russia has already touched $6 billion and is growing rapidly.  Modi targets reducing India’s oil dependence by 10% and that means a big push to domestic production of oil.

Why the big hurry now? Typically, M&A in oil has always peaked when oil prices are at lows. With substantial resources and low oil prices, India had two choices. It could have either opted to create a huge strategic oil reserve or to expand capacity. It has rightly opted for the latter alternative.

Larger macro implications…

Reducing dependence on oil imports is not just a strategic step but also an economic necessity. The INR is always susceptible to strong oil prices as it does not have the exorbitant privilege of the US$. High oil price has a cascading effect on Indian economy. It increases inflation, raises the cost of industrial inputs, increases the fiscal deficit beyond the comfort zone and also imperils external stability due to a weak current account position. A focus on expanding oil capacity is a definitely a step in the right direction! ©

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