By Manish Gupta
The ‘equity oil’ issue got highlighted recently, after India faced the double whammy of spike in oil prices following the decision by Opec+ nations to cut production and Russia’s Rosneft stating it will give dividends, not equity oil, to India. For India, which imports 87% of its oil needs, equity oil is key a energy-security tool. Manish Gupta takes a look
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It ensures availability and reduces uncertainty. Equity oil helps a country secure a reliable supply and partially protects it from geopolitical risks in terms of oil supply. Energy security is a major concern for India, and investing in oil assets abroad is a strategic move to ensure oil availability and support the country’s economic growth. India started investing in oil assets abroad in the 1990s. Some of these earn dividends, while other investments are for equity oil.
Why India needs equity oil
With limited domestic oil reserves and falling production, India is the world’s third-largest oil importer, which makes it vulnerable to fluctuations in global oil prices and supply disruptions. Ironically, since 2015, when Prime Minister Narendra Modi exhorted stakeholders to reduce import dependence, domestic crude oil production has fallen by about 19%—from 35.9 million tonne in FY15 to 29.2 million tonne in FY23.
Import dependence, instead of falling from 77% in 2015 to 67% by 2022 as Modi had wished, shot up to 87% in FY23. And, the import bill rose 30% to nearly $147 billion in FY23. No new oil blocks were awarded in most part of the last decade. State-run ONGC, India’s largest oil and gas producer, hasn’t made any major recovery after the drying up of Bombay High as higher dividends constrain its cash reserves and capex.
India’s equity-oil investments
ONGC Videsh (OVL), the overseas arm of India’s Oil and Natural Gas Corporation (ONGC), has the biggest stakes in foreign oil fields, particularly in Russia, Brazil and Mozambique. OVL has stakes in 33 oil and gas projects in 15 countries — Azerbaijan (two projects), Bangladesh (two), Brazil (two), Colombia (five), Iran (one), Iraq (one), Libya (one), Mozambique (one), Myanmar (six), Russia (three), South Sudan (two), Syria (two), UAE (one), Venezuela (two) and Vietnam (two).
The company, as per its website, adopts a balanced portfolio approach and maintains a combination of producing, discovered, exploration and pipeline assets. Other Indian companies like Oil India, BPCL and IOCL have also made investments in a few countries, including Sudan, the UK and Peru. These are both equity and debt investments.
How effective has equity-oil strategy been?
Though the strategy is sound, it is yet to prove beneficial for the Indian oil sector. Investments in equity oil do secure long-term crude oil supplies for the country and reduce India’s dependence on the volatile international oil markets, at least for the amount of oil under agreement in equity deals. However, considering the country’s total requirement, these investments are quite low and are far from having any meaningful stabilising effect on India’s energy security.
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India’s biggest equity-oil investor, OVL, gets six million barrels whereas the yearly requirement is about 235 million tonne. Apart from the investments being small, there are other factors such as geopolitical risks, unstable oil prices, and operational challenges.
At times, India has been elbowed out by the Chinese in acquisition of these assets. A decade ago, India lost to China in Kazakhstan, on the giant Kashagan oil-field—India was looking to buy a 8.4% stake from ConocoPhillips. Generally, these resource-rich hot spots have high geopolitical risks.
India’s investments in Sudan and Venezuela have faced political instability and sanctions affecting the supply of oil. Now, the assets in Sudan and Russia are facing challenges.