Indian oil and gas industry 2016: Slippery road ahead

It’s been a hard 18 months for the price of crude oil, as it’s plunged from a high of over a $110 dollar a barrel in June of 2014 to about $37, the lowest it’s been in almost seven years—a drop of about 66 percent.

And experts predict to see a continued trend of depressed prices in 2016.

That creates problems for Indian upstream oil companies. The plummeting prices make it harder, everyday, to stay profitable. Informal discussions with the IT head at one oil company, who prefers not to be named, suggests that efforts have already been made to use technology to lower the break-even point of the company. “If the cost of oil goes down to $25 (a barrel), it’s going to be hard,” he says.

66% That’s by how much the price of crude oil has fallen in the last 18 months. 

But the falling price of oil is good for the Indian economy. India produces only a small portion of the oil and gas its economy needs–which means the rest has to be imported. And as the world’s fourth-largest consumer of oil, or the third, depending on who you believe, that’s a lot of imported oil.

In 2014-2015, the country imported 189.4 million metric tons (MMT) of crude oil, paying $112.7 billion for it. That’s about 25 percent of India’s total import bill. According to the Indian Petroleum Planning and Analysis Cell, in 2014-2015, India imported 78.5 percent of its crude oil. From April to October 2015, India imported 80 percent of its crude oil needs.

By 2040, India’s dependence on imported oil will rise to 90 percent, says a report released by International Energy Agency at the end of November 2015.

India’s dependency on imported oil is likely to grow as it tries to achieve double-digit economic growth and its consumption increases. Currently, per capita, India’s energy use is only a third of the global average. That means, it’s got a lot of room to grow. According to International Energy Agency, between 2013 and 2040, the growth of demand for oil in India will be the highest in the world.  

On the gas side of things, in 2014-2015, India imported about 36 percent of its gas needs. But it’s going up. From April-October of 2015, India imported 37 percent of its gas needs. For the same period this year, it imported 39 percent.

Experts predict to see a continued trend of depressed prices in 2016.

The bottom line is that India is extremely dependent—and it pays plenty for–imports of oil and gas. Which makes it vulnerable to global oil and gas prices.

That’s why the government has made it a priority to find ways to make India more self-sufficient. In September 2014, for example, the government decided to auction 69 small oil and gas fields to private firms. According to a Reuters report, “The Indian government is trying to make it easier for companies like Reliance Industries, ONGC, and Vedanta, to tap small and difficult fields to boost domestic and meet a target to halve imports in 15 years.”

That’s good news for Indian oil companies.

Private companies account for about 25 percent of domestically produced oil, and much of that comes from Cairn India. But the International Energy Agency believes that India’s domestic production is likely to “tail off due to limited resources and relatively high costs for new projects.

In 2016, CIOs in India’s oil and gas upstream companies will likely turn increasingly to digitization, analytics, and robotics to lower above-the ground costs. 

On the gas front, India’s attempt to encourage more privatization in exploration is running at odds with its other policies. In September of 2015, the government lowered the price of natural gas by 18 percent. It’s a price that will stay in effect until March 2016. The price reduction hurts gas producers and creates less incentive for gas exploration companies to invest.

The government’s decision to cut natural gas prices has prevented energy explorers and producers from undertaking new capital expenditure, according to Standard & Poor’s Ratings Services.

The over-arching trend in the next year for upstream oil and gas companies are depressed prices. This trend of low prices isn’t getting smiles within India’s oil-producing companies. Domestically, ONGC, Oil India, and a few private players and joint-ventures, produce crude oil. From April to October 2015, ONGC produced 10.9 MMT of crude, Oil India produced 1.9 MMT, and the other players produced 6.8 MMT.

Lower prices means these companies will have to find ways to be profitable at the same or lower toplines.

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What does that mean for CIOs India’s oil and gas-producing companies? Oil and gas upstream players are likely to focus on initiatives with financial and operational impact; measures that will ensure profitability even at depressed crude prices. In 2016, they will likely turn increasingly to digitization, analytics, and robotics to lower above-the ground costs.