India’s Quest for Energy Security

By Dr Arvind Kumar, President India Water Foundation

Energy consumption is both a necessary condition for economic growth and a consequence of it. It is high time to acknowledge the important challenges to India’s energy security, which are both internal and external in nature. Internally, India has a limited resource base, lacks adequate infrastructure and an integrated long-term energy policy. There is also the growing concern over environment and problems of political and bureaucratic inertia. The external challenge lies in getting a continuous supply of energy at reasonable prices as domestic production is low but the demand is high.Twenty-First Century’s global realities have altered the concept of national security. While national security is a holistic concept, energy security is one of its major components. The latter essentially involves ensuring uninterrupted supply of energy to support the economic and commercial activities necessary for sustained economic growth. As far as India is concerned, energy security emanates from the growing imbalance between the demand for energy and its supply from indigenous sources resulting in increased import dependence.

As energy is the main driving force of India’s economic growth, its availability with required quality of supply is key to sustainable development. The commercial energy has a direct impact and influence on the quality of service in various socio-economic fields and inadequate energy supply can adversely affect these vital and essential requirements of the society. Thus, it is essential to augment significantly the energy availability at a rapid pace so that aspirations of those who have remained insulated from such important inputs and services are fulfilled and they are enabled to have a reasonable access.

With a population of over one billion, India is the world’s second most populous country and ranks fifth in the world in terms of primary energy consumption, accounting for about 3.5 per cent of the world’s commercial energy demand. With an average GDP growth rate of around 8%, India is currently one of the fastest growing economies of the world. The future levels and patterns of energy use in India, therefore, have important implications – at the national level in terms of environmental impacts of energy use, issues of access and equity, and at the global level in terms of geopolitics of energy supply and GHG emissions related to the combustion of fossil fuels. India’s energy mix scenario until 2032 is shown in Table-1 below.

Table-1: India’s Energy Mix in different energy-use scenarios in 2032 (%)

Source: Planning Commission, Integrated Energy Policy, New Delhi, September 2006, p.44.

In view of rapidly increasing demand for energy, India is expected to vault to third place by 2030—behind only the United States and China. An important driver of this burgeoning demand in the coming years will be the many Indian households expected to transition from traditional energy sources to commercial ones such as oil and natural gas and nuclear energy.

Owing to insufficient domestic energy resources, India is increasingly looking abroad to sat­isfy its increasing energy demand. India presently imports about two-thirds of its oil consumption and its dependence on hydrocarbons is expected to grow further over the next few decades. By 2030, the International Energy Agency projects that India will import one-third of its coal, half of its natural gas, and a whopping 90 percent of its oil.

Oil

According estimates, India had 5.6 billion barrels of proven oil reserves as of January 2009, the second-largest amount in the Asia-Pacific region after China. India’s crude oil reserves tend to be light and sweet, with specific gravity varying from 38° API in the offshore Mumbai High field to 32° API at other onshore basins.

Currently, India’s import dependence on oil is75%, and is likely to reach 90% by 2030. Indian companies own oil producing assets in seven countries with an investment of $12 billion and production of 8.87 MT. India’s total oil imports in 2009-10 were 160 MT, as against 128 MT in 2008-09. As compared to 2004-05 (96MT), oil imports in 2009-10 indicate an increase of 66%.

India produced roughly 880 thousand bbl/d of total oil in 2008, of which approximately 650 thousand bbl/d was crude oil, with the rest of production resulting from other liquids and refinery gain. India has over 3,600 operating oil wells. Although oil production in India has slightly trended upwards in recent years, it has failed to keep pace with demand and is expected by the EIA to decline slightly in next couple of years.

India’s oil consumption has continued to be robust in recent years. In 2007, India consumed approximately 2.8 million bbl/d, making it the fifth largest consumer of oil in the world. Demand

grew to nearly 3 million bbl/d in 2008. EIA anticipated consumption growth rates flattening in 2009 largely due to slowing economic growth rates and the recent global financial crisis.

The combination of rising oil consumption and relatively flat production has left India increasingly dependent on imports to meet its petroleum demand. In 2006, India was the seventh largest net importer of oil in the world. With 2007 net imports of 1.8 million bbl/d, India is currently dependent on imports for 68 percent of its oil consumption. The EIA expects India to become the fourth largest net importer of oil in the world by 2025, behind the United States, China, and Japan. India’s major sources of import of oil are shown in Table-2.

Table-2 India: Principal Sources of Imported Oil (in MMT)

It is revealed from Table-2 that India’s largest crude oil import partner is Saudi Arabia, followed by Iran. Nearly three-fourths of India’s crude oil imports come from the Middle East. The other sources include countries in Africa, Latin America and Russia. The experts expect this geographical dependence to rise in light of limited prospects for domestic production.

In support of the country’s energy security, India intends to develop a strategic petroleum reserve (SPR). The decision has been made to set up a strategic reserve of 5 million tons (36.6 million barrels) of crude oil in underground structures in Mangalore, Visakhapatnam, and Padur. The project is expected to come online in 2012. The location of the storage facilities was selected to be along the coast so that the reserves could be easily transported to refineries during a supply disruption. The SPR project is being managed by the Indian Strategic Petroleum Reserves Limited (ISPRL), which is part of Oil Industry Development Board (OIDB), a state-controlled organization. Despite these plans, India does not have any strategic crude oil stocks at this time.

Natural Gas

According to broad estimates, India had 38 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2009. The EIA estimates that India produced approximately 1.1 Tcf of natural gas in 2007, up only slightly from 2006 production levels. The bulk of India’s natural gas production comes from the western offshore regions, especially the Mumbai High complex. The onshore fields in Assam, Andhra Pradesh, and Gujarat states are also significant sources of natural gas. The Bay of Bengal has also become an important source of natural gas for the country.

In 2007, India consumed roughly 1.5 Tcf of natural gas, approximately 100 Bcf more than in 2006, according to EIA estimates. Natural gas demand is expected to grow considerably, largely driven by demand in the power sector. The power and fertilizer sectors account for nearly three-quarters of natural gas consumption in India. Natural gas is expected to be an increasingly important component of energy consumption as the country pursues energy resource diversification and overall energy security.

Although India’s natural gas production has consistently increased, demand has already exceeded supply and the country has been a net importer of natural gas since 2004. India’s net imports reached an estimated 353 Bcf in 2007. India imports natural gas via liquefied natural gas (LNG).

India began importing liquefied natural gas (LNG) in 2004. In 2006, India imported 254 Bcf of LNG, making it the seventh largest importer of LNG in the world. India’s LNG imports in 2006 came from Algeria, Egypt, Nigeria, Oman, Qatar, United Arab Emirates, Australia, and Malaysia. Qatar was by far the largest supplier in 2006, accounting for nearly 86 percent of imports. India imports LNG through both long-term contracts and spot shipments.

Currently, India has two LNG import terminals, with several others that are planned or proposed. India started receiving LNG shipments in January 2004 with the start-up of the Dahej terminal in

Gujarat state. Petronet LNG, a consortium of state-owned Indian companies and international investors, owns and operates the Dahej LNG facility with a capacity of 5 million tons per year (mta) (975 bcf/y). India’s second terminal, Hazira LNG, started operations in April 2005, and is owned by a joint venture of Shell and Total. The facility has a capacity of 2.5 mta (488 Bcf/y), which may be expanded to 5 mta (975 Bcf/y) in the future. Long-term growth in demand for LNG remains unclear however, as price is an issue of contention in India and increasing domestic natural gas production is expected from eastern offshore fields.

Industry analysts note that Indian companies appear unwilling to commit to long-term LNG supply contracts at international prices. While negotiations are currently underway for several long-term LNG supply deals, whether or not India’s bids will be accepted is questionable in light of the low prices that India has offered to pay. Instead, India is becoming an important destination for spot LNG cargoes.

Electricity

In 2006, India had 144 gigawatts (GW) of installed electric capacity and generated 703 billion kilowatt hours. Nearly all power in India is generated with conventional thermal sources, which produced over 80 percent of electricity in 2006. Hydroelectricity has been a consistent source of power in India, accounting for nearly 16 percent of power generated in 2006. Finally, nuclear energy produced roughly 2 percent of electricity during the same year, while geothermal and other renewable sources accounted for as little as 1 percent.

India suffers from a severe shortage of electric capacity. According to the World Bank, roughly 40 percent of residences in India are without electricity. In addition, blackouts are a common occurrence throughout the country’s main cities. The World Bank also reports that one-third of Indian businesses believe that unreliable electricity is one of their primary impediments to doing business. Further compounding the situation is that total demand for electricity in the country continues to rise and is outpacing increases in capacity. Adequate additional capacity has failed to materialize in India in light of market regulations, insufficient investment in the sector, and difficulty in obtaining environmental approval and funding for hydropower projects. In addition, coal shortages are further straining power generation capabilities.

In order to address this shortfall, the Indian government has set the goal of adding 90,000 MW of additional electric generation capacity by 2012. In light of these targets, the private sector is beginning to step up investment in the sector. For example, Uk-based Hinduja Group, which already operates several power plants in the country, has pledged $15 billion towards the addition of 10,000 MW of capacity over the next several years. The country also grapples with electricity efficiency issues. In order to improve efficiency standards, the Energy Conservation Act was passed in 2002, which established the Bureau of Energy Efficiency and has sought to promote efficient use of energy and labeling of energy-intensive products.

It is also possible to import some electricity into India, as the country’s power grid is interconnected with the grids in Nepal and Bhutan. This has allowed for the export of surplus electricity to India, however, this is not likely to prove sufficient to make up for India’s lack of electric generation capacity.

COAL

Coal has been a mainstay of Indian energy. It accounted for 53 percent of India’s energy consumption in 2007, and demand is set to grow dramatically over the coming decades. Coal use for electricity generation is projected to grow 2 percent every year, almost doubling its share of India’s generating capacity by 2030. This will increase not only domestic production but also imports: Over the next two decades, coal imports are projected to triple compared with the 2007 level.

Coal is used mainly for generating electricity, and currently 44 percent of rural households (amounting to 400 million people) do not yet have access to electricity. The government and its coal ministry plan to ramp up production by 65 percent in less than a decade to meet the growing demand for rural electrification.

Because coal is both cheap and abundant domestically, it may seem like the perfect solution to India’s energy and electricity woes. However, using coal has severe health, environmental, and economic effects. As quality of life improves for most Indians, many will protest against this dirty pollutant. As the world moves closer to a consensus on climate change, using coal at this growing rate may become untenable. To work around these problems, India will need to address market inefficiencies. Developing alternatives to coal will also be essential. India’s coal reserves are not as large as previously thought. At the current usage rate, India’s reserves would be depleted in 80 years. At the projected rate of growth in production, that number becomes 40. Transporting coal is cumbersome and inefficient. Most of the domestic reserves are concentrated in India’s eastern and central states, far from the urban centers most in need of increased energy.

Nuclear Energy

Because India’s coal production at the current level is sustainable for only a few more decades, viable alternatives must be developed and brought to the market. Nuclear power is a low-carbon energy source. That means that the pollution problems stemming from generation are minimal; instead, its environmental costs show up at the back end of the production chain in the storage of nuclear waste, a testy political issue.

At present, nuclear power accounts for only 2.3 percent of electricity generation in India. The Indian government plans to raise nuclear energy’s contribution to about 5 percent by 2020 and hopes to derive 25 percent of total energy from nuclear power by 2050. These goals are ambitious, especially in an industry that has generally run behind the government’s planning targets. The U.S.-India agreement on civil nuclear cooperation makes reaching these goals more likely. Realistically, however, a significant increase in nuclear power is a long-term, not a short-term, option.

In the aftermath the conclusion of the U.S.-India civil nuclear agreement, France and Russia have been the first to sign nuclear power deals with India. Nonetheless, moving from designation to production will be slow. The U.S. suppliers are reluctant to jump in until India has put in place liability legislation.

Conclusion

India has to depend on imports for a long term to meet growing energy demands and maintain the pace of economic growth. Even if India succeeds in exploiting its full hydro-energy power potential of 150,000 MW, the contribution of the hydro-energy to the energy mix will be energy 1.9-2.2 per cent. At the same time, even if a 20-fold increase takes place in country’s nuclear power capacity by 2030-31, the contribution of nuclear energy to India’s energy mix can, at best, expected to be 4.0-6.4 per cent. Even with a 40-fold increase in their contribution to primary energy, renewable may, at best account for only 5 to 6 per cent of India’s energy mix by 2031-32. Nevertheless, in all scenarios, the dependence on fossil fuels will be between 74% and 85% of the energy mix, as against over 90% at present.

In other words, dependence on energy imports will remain. India’s long term energy interests demand a well-concerted energy diplomacy based on substantial, robust and multi-faceted global engagements, which need to based on bilateral and regional ‘strategic energy partnerships.’

Article published in SAR Economist | August 2011 Issue