In India's reforms agenda, oil takes a starring role

From heavily subsidizing diesel prices to unshackling its transport fuel prices from controls and completely aligning it with the global market, India's oil sector reforms have come a long way over the past three years.

The country's state-owned oil marketing companies on June 16 started daily adjustment of prices of gasoline and diesel -- two products that together account for about 60% of total oil products consumption.

With India importing about 80% of its crude oil needs, the move to revise retail prices daily is an effort to minimize volatility, increase price transparency, and help marketing companies cut losses.

Before this move, motor fuel prices at pumps were revised on the first day and in the middle of every month. Private retailers such as Reliance Industries Ltd. and Essar Oil account for a much smaller share of the retail oil transport fuels market, but they are also expected to follow suit.

The latest move on retail pricing -- adjusting prices in line with global price fluctuations -- is one of the many reforms the central government has initiated amid robust growth in domestic oil demand.

LET'S LEAVE IT TO MARKET FORCES

After coming to power in May 2014, the BJP-led government has pursued policies that have helped India achieve sustained growth, and the oil sector has got its fair share of attention.

In fiscal 2013-2014 (April-March), under-recoveries by state-owned oil marketing companies were about Rupees 1.4 trillion ($21.6 billion). After diesel prices were deregulated in late 2014, under-recoveries came down to Rupees 763 billion in fiscal 2014-2015.

They fell to Rupees 276 billion in 2015-2016, the first fiscal year when India fully reaped the benefits of diesel price deregulation. It fell further to Rupees 228 billion in fiscal 2016-2017.

The deregulation of diesel has created a more level playing field for  private refiners.

In addition to diesel sector reforms, the government has been making a big effort to boost LPG penetration across the country.

The federal government has aggressively pushed to expand the LPG dealership network and also urged the more affluent to give up subsidies and pass those savings to the economically poorer sections of society.

This has helped LPG demand see double-digit growth in 2016, a trend that is likely to be repeated in 2017.

LPG's gain has been kerosene's loss, however. While the government pushes for use of cleaner fuels, it has also given the go-ahead to state-owned companies to gradually raise the price of kerosene, which once accounted for more than 40% of overall petroleum subsidies.

The government's move to do away with subsidies on diesel, cap subsidies on LPG, and gradually reduce subsidies on kerosene has helped the country's exchequer gain in a big way.

FINALLY, A HYDROCARBONS POLICY

In early 2016, the government finally unveiled its long-awaited Hydrocarbon Exploration Licensing Policy, the first auction of oil and gas fields in six years, aiming to attract investment in the upstream sector.

The policy was a sea change from the cost-recovery model to a revenue-sharing one and includes a uniform licensing system that covers conventional and unconventional hydrocarbons. It also features an "open acreage policy" that allows companies to evaluate and define the areas they want to bid for.

The launch of HELP was followed by the award of 31 contract areas comprising 44 oil and gas fields under a revenue sharing model in February 2017. The government expects these contracts to monetize 293 million barrels of oil and 22 Bcm of gas over 15 years.

These are relatively small volumes, but would indicate whether companies are sufficiently attracted by the new regime to invest.

As demand for oil products grow, India also sees the need to ensure that the cost of feedstocks is kept low. New Delhi is making efforts to expand its strategic reserves, as a result.

India has three Strategic Petroleum Reserves in the south with a combined capacity of 38.8 million barrels. The government has finalized plans for two additional reserves with a capacity of 37 million barrels each -- one in the eastern state of Odisha and another in the northwestern state of Rajasthan. This will take overall storage capacity to more than 15 million mt by 2020 and should help India to build and maintain sufficient feedstock when prices are relatively low, and absorb the shocks of global price volatility.

IF INDIA'S LUCK TURNS

India is making a concerted effort to lower its reliance on imported crudes, with the government focusing on boosting domestic production, promoting renewables, and improving the refining process, at a time of increasing demand.

Prime Minister Narendra Modi said in December that India would strive to reduce crude imports by 10% by 2022. Oil minister Dharmendra Pradhan has said that India would follow a five-point plan -- raise domestic oil and gas production, improve energy efficiency, promote alternative fuels and renewables, demand substitution, and improve the refining process.

But stagnant domestic crude oil production will not be an easy challenge to overcome.

The dip in the global oil and commodity prices, coupled with deregulation of petrol and diesel prices, have sharply reduced the fuel subsidy bill and bring down the overall deficit. It has not just helped the oil sector, but the economy as a whole.

While sound economic policies have played a big role in improving the macroeconomic scenario and the oil sector has got a big slice of the pie, one should not forget that luck has played a huge role in the form of low global oil and commodity prices.

But going forward, higher commodity prices could put upward pressure on the import bill. How the government will address that issue amid flat domestic production will be closely watched by the market.