Oil importer India concerned about crude prices rising

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Getty Images

India is concerned about an uptrend in oil prices which it considers inevitable. “We expect that next year, U.S. oil production will fall by 400,000 barrels per day because of projects not making economic sense … We may well see soon upwards pressure in price” said IEA Executive Director Fatih Birol at a press conference of the G20 energy ministers meeting. Global investments in oil are expected to be 20 percent less this year than in 2014. This reduction in upstream investment is the biggest decline in history. Oil projects are starting not to make economic sense.

A reduction of 400,000 barrels a day in the US alone is expected next year. A market adjustment with higher prices is expected, and this is bound to affect India, as any increase in oil prices is bound to affect its import bills. Although India produces oil, it is the fourth largest consumer of the commodity in the world, making it a net importer. In 2014, it only produced about 23.7 percent of its total requirements. This dependency on oil imports has prompted the country to encourage oil companies to increase domestic production. Reliance Industries Ltd. (RIL), a privately owned outfit, and state-owned Oil and Natural Gas Corp. Ltd. (ONGC) have capitalized on lower exploration and development costs and pushed into domestic upstream production with their own projects.


In light of these developments, The Economic Times reported that ONGC announced it would seek government support for the $6 billion deepwater project at KG-DWN-98/2 or KG-D5 block in the Krishna-Godvari basin off India’s east coast. The project is not economically viable at current oil price levels. “You need to do some out of the box thinking to make the project viable in this environment,” a senior ONGC executive was quoted as saying. The original Field Development Plan (FDP) for the KG-D5 project is being reworked. Under the new plan, capital expenditures will be reduced while boosting production that would allow the project to be economically feasible at current prices. The previous FDP had production cost at $60 per barrel while the reworked plan aims at reducing that by $10.

Once operational, the deepwater KG-D5 project will reduce India’s need for non-domestic oil. In line with the government’s desire to reduce the need for foreign oil by 10 percent over the next seven years. That is why the original Field Development Plan that was submitted to the Directorate General of Hydrocarbons (DGH, India’s upstream regulator) is being reworked.

In the end, to avoid having to import oil at current levels for many years to come, big-ticket hydrocarbons projects will have to forge ahead. Even if current price levels do not make them viable for the time being.

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