Treading the slippery path

Efficiency enhancement through pricing and non-pricing methods is the need of the hour in meeting our energy adequacy.

With India's energy efficiency estimated to be the fifth lowest in the world, there is a trem­endous scope to improve efficiency. Depend­ence on oil imports is expected to rise.

The government must take measures to promote effi­c­i­­en­cy through pricing signals as well as through non-price initiatives. There is considerable scope for non-price initiatives to promote energy efficiency.

The pricing of energy in India is distorted as the price signals don't reflect the relative scarcity of the raw material and the environmental costs to consuming it. This breeds inefficient usage of fossil fuels.

Although petrol price is deregulated from last year, it is alleged that oil marketing companies don't have a free hand in determining its prices. A market-based pricing system that will promote energy conservation by pro­viding an economic incentive to shift to more energy efficient technologies, and decontrol of energy prices to ensure profitability for oil companies and hence may attract more investment in energy sector thereby leading to greater output.

Acquisition vs import

While it is a prudent economic policy to rationalise energy consumption, a far sighted policy will also require enhancing energy supply through acquisition of oil assets abroad. Acquiring energy assets abroad make sense bec­ause excessive reliance on imported oil may make the domestic economy vulnerable to volatility in interna­tional oil prices.

Excessive reliance on oil imports may strain our current account deficit if there is a sharp spike in the international crude oil prices. Every $10/bbl rise in full-year average crude oil prices in the international market results in an increase in net oil imports (and therefore current account deficit) by 0.4 per cent of GDP.

Thanks to RBI's holding of substantial foreign exch­ange reserves, the high current account defi­cit may not have any adverse impact on rupee exchange rate. But we escape the inflationary consequences of the spurt in global crude oil prices. If global oil price jumps $10/bbl and assuming all increase is passed on to consu­mers, headline WPI and CPI inflation will rise by 0.9 per cent and 0.6 per cent (direct impact), respectively followed by a similar impact through cascading effect. If there is no pass through into domestic prices for con­trolled fuel products, total oil subsidy burden (including that borne by the oil companies) will increase to 1.6 per cent of GDP assuming oil prices average $110/bbl in 2011-12.

Therefore, although Indian oil companies bought equity stakes in foreign O&G blocks over the last few years, its success in this area is far from satisfactory. The­re is a need to revisit our overseas acquisition policies.

Strategies for overseas acquisition

India must focus on entering into a mutually bene­ficial partnership with energy surplus countries wherein it agrees to invest in oil exploration and development projects (of the host country) in exchange for oil import. This will be a win-win situation as India would have assured supply of oil while the par­tnering country receives capital and expertise.

Acquiring oil assets should form a part of the coun­try's diplomatic agenda. The high risk can be hedged by soliciting strategic support from the government of the host countries. The government in turn should be insured by financial assis­tance and investments. Thus, Indian government must extend support to oil companies' efforts to gain foreign assets through its diplomatic intervention and follow-up with foreign governments.

Creation of a sovereign energy fund will go a long way in extending financial backing for Indian companies looking to acquire oil and gas assets abroad. Building a financial war chest will also help Indian companies compete in the global oil and gas asset market.

Financing for acquisition of oil and gas assets may be carried out by the PSUs through their own resources, as far as possible. However, sovereign funds could be used to commit additional strategic investments.