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Government scraps Windfall Tax on Crude Oil
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Windfall Tax
Why in the News?
The Government of India has scrapped the windfall tax on crude oil, which was previously set at ₹1,850 per tonne.
What is Windfall Tax?
| Details | |
| Definition | A higher tax levied on companies that earn unexpected and extraordinary profits due to external factors. |
| Purpose | To capture a portion of excess profits from industries benefiting from global price surges, such as oil. |
| Imposition in India | Imposed as a Special Additional Excise Duty (SAED) on crude oil production and exports of diesel, petrol, and aviation turbine fuel (ATF). |
| Dynamic Tax Rate | Revised every 15 days based on international oil prices in the preceding fortnight. |
| First Imposed | July 1, 2022, during the Russia-Ukraine conflict and post-COVID recovery. |
| Application | Applies to domestically produced crude oil and exports of diesel, petrol, and ATF. |
| Reasons for Imposing |
|
| Benefits |
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India’s Crude Oil Trade:
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PYQ:[2020] The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of: (a) Crude oil (b) Bullion (c) Rare earth elements (d) Uranium [2017] Petroleum refineries are not necessarily located nearer to crude oil producing areas, particularly in many of the developing countries. Explain its implications. (250 words) |
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US overtaskes UAE as India’s second largest LNG supplier
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Data related to LNG import
Mains level: Trade dynamics related to LNG
Why in the news?
In 2023, the US surpassed the UAE to become India’s second-largest supplier of liquefied natural gas (LNG), providing 3.09 million tonnes (MT).
World LNG Report 2024 by International Gas Union (IGU)
- US as a Major Supplier: The report highlights that the United States has displaced the UAE to become India’s second-largest supplier of liquefied natural gas (LNG) in 2023, with shipments reaching 3.09 million tonnes (MT).
- Trade Growth: The US supplied India with 1.8 MT of LNG in 2019, which increased to 3.86 MT in 2021, indicating a significant rise in trade volume despite a decrease in 2022 due to rising prices.
- Qatar’s Dominance: Qatar remained India’s largest LNG supplier from 2019 to 2023, with shipments peaking at 10.92 MT in 2023, reflecting its consistent role in India’s energy supply.
- The decline of African Suppliers: The report notes a significant decline in LNG shipments from African nations, particularly Nigeria and Angola, which saw their exports to India drop from pre-pandemic levels of around 2.7 MT and 2.9 MT, respectively, to just 0.73 MT each in 2023.
Present trade dynamics
- Price Sensitivity: Indian companies remain price-sensitive, with LNG imports being contingent on competitive pricing. Analysts suggest that if LNG prices stay below $12 per mBtu, there could be significant growth in imports.
- Geographical Advantage: The proximity of US LNG cargoes to India via the Cape of Good Hope makes it more cost-effective for sellers to export to India compared to North Asia.
- Long-term Contracts: Ongoing long-term contracts signed by Indian entities with US suppliers continue to underpin LNG consumption, despite fluctuations in global prices.
Use of LNG in India:
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What can be done?
- Strengthening Domestic Policies: India could benefit from reforms in domestic gas policies, including greater transparency over LNG inventory levels and improvements in gas pipeline capacity, to enhance the efficiency of LNG imports and distribution.
- Creating Price Stability: The need to establish a stronger index link between LNG import prices and domestic gas prices could mitigate price risks for LNG importers, ensuring that long-term contracts remain aligned with market conditions.
- Enhancing Infrastructure: Govt. should invest in LNG infrastructure, including regasification terminals and transportation networks, which can facilitate increased imports and improve supply chain efficiency.
- Diversifying Supply Sources: To reduce dependency on specific regions, India should explore diversifying its LNG supply sources, including potential agreements with emerging suppliers in different regions.
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[pib] Green Ammonia Production under SIGHT Program
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Green Ammonia, SIGHT Program, National Green Hydrogen Mission.
Why in the News?
- Solar Energy Corporation of India (SECI) has initiated the bidding process for a total capacity of 5.39 lakh Metric Tonnes (MT) per annum of Green Ammonia production.
- The initiative falls under Mode 2A of the Strategic Interventions for Green Hydrogen Transition (SIGHT) Programme, part of the National Green Hydrogen Mission led by the Ministry of New & Renewable Energy (MNRE).
What is Green Ammonia?
|
About the National Green Hydrogen Mission
- The National Green Hydrogen Mission was launched in January 2023.
- Objective: To make India a ‘global hub’ for using, producing and exporting green hydrogen.
- Earlier, the National Hydrogen Mission was launched on August 15, 2021, with a view to cutting down carbon emissions and increasing the use of renewable sources of energy.
- The Ministry of New and Renewable Energy (MNRE) formulates the scheme guidelines for the implementation of these missions.
Key features of the NGHM
- Power capacity: The mission seeks to promote the development of a green hydrogen production capacity of at least 5 MMT per annum with an associated renewable energy capacity addition of about 125 GW in the country by 2030.
- Job creation: It envisages an investment of over ₹8 lakh crore and creation of over 6 lakh jobs by 2030.
- Reducing energy import bill: It will also result in a cumulative reduction in fossil fuel imports of over ₹1 lakh crore and abatement of nearly 50 MMT of annual greenhouse gas emissions by 2030.
- Export promotion: The mission will facilitate demand creation, production, utilisation and export of green hydrogen.
- Incentivization: Under the Strategic Interventions for Green Hydrogen Transition Programme (SIGHT), distinct financial incentive mechanisms are provided.
- Green Hydrogen Hubs: Regions capable of supporting large-scale production and/or utilisation of hydrogen will be identified and developed as Green Hydrogen Hubs.
What is the SIGHT Program?
- In the initial stage, two distinct financial incentive mechanisms proposed with an outlay of ₹ 17,490 crore up to 2029-30:
- Incentive for manufacturing of electrolysers
- Incentive for production of green hydrogen.
- Depending upon the markets and technology development, specific incentive schemes and programmes will continue to evolve as the Mission progresses.
PYQ:[2019] Consider the following statements:
Which of the statements given above is/are correct? (a) 1 and 3 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3 |
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GAIL inaugurates 10 MW Green Hydrogen Plant in Madhya Pradesh
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Green Hydrogen; the National Green Hydrogen Mission
Why in the news?
GAIL (India) Ltd has commissioned its first green hydrogen plant at Vijaipur in Madhya Pradesh, marking a significant step for the nation’s largest natural gas transmission and distribution firm into new and alternate energy sources.
About Vijaipur Green Hydrogen Plant
Major Objective: Hydrogen Blending
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What is Green Hydrogen?
- Green hydrogen is produced through electrolysis, where electricity derived from renewable sources, such as solar or wind power, is used to split water molecules into hydrogen and oxygen.
- Since it relies on renewable energy, green hydrogen production has no direct emissions of CO2 or other greenhouse gases.
What is the Green Hydrogen Standard?
- Definition of Green Hydrogen: It has defined green hydrogen as having a well-to-gate emission – including water treatment, electrolysis, gas purification, drying and compression of hydrogen – of not more than 2 kg CO2 equivalent per kg of hydrogen produced.
- Nodal Agency: The Bureau of Energy Efficiency, Ministry of Power, will be the nodal authority for green hydrogen production projects.
Back2Basics: National Green Hydrogen Mission, 2023
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Significance of Hydrogen Energy
Types of HydrogenHydrogen extraction methods are classified into three types based on their processes: Grey, Blue, and Green etc.
|
PYQ:[2023] Consider the following heavy industries:
Green hydrogen is expected to play a significant role in decarbonizing how many of the above industries? (a) Only one [2023] With reference to green hydrogen, consider the following statements:
How many of the above statements are correct? (a) Only one |
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The Socio-ecological effects of LPG price hikes
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Government Initiatives and Programmes;
Mains level: Issues related to affordability of LPG gas;
Why in the News?
The ACCESS survey (2014-2015), conducted by the Council on Energy, Environment and Water, found LPG’s cost to be the foremost barrier to its adoption and continued use in rural poor households.
Government Initiatives for LPG Fuel:
- Government Initiatives: The Indian government has promoted using LPG (liquefied petroleum gas) as a clean cooking fuel, particularly in rural households.
- These initiatives include the Rajiv Gandhi Gramin LPG Vitrak scheme, the ‘PAHAL’ scheme for direct benefit transfers, and the Pradhan Mantri Ujjwala Yojana (PMUY) aimed at providing LPG connections to below-poverty-line households.
- Subsidies and Incentives: The government has provided subsidies and incentives to encourage the adoption of LPG without subsidies for the people who can afford it.
- For example, the ‘Give it Up’ program encouraged consumers to voluntarily surrender their LPG subsidies, which were transferred to below-poverty-line households.
Challenges:
- Affordability: Despite government efforts, the affordability of LPG remains a challenge for many households, especially those in rural and below-poverty-line communities. Reports indicate that LPG prices in India were among the highest globally around ₹300/litre.
- Dependency on Traditional Fuels: Studies, such as the one conducted in the Jalpaiguri district of West Bengal, highlight the continued dependency of local communities on traditional fuelwood for cooking.
- Forest Dependency: The persistent use of fuelwood has implications for forest conservation and livelihoods, particularly in regions with degraded forests like Jalpaiguri.
Way Forward:
- Need for Comprehensive Solutions: While government initiatives have aimed to promote LPG use, addressing affordability issues and ensuring access to clean cooking fuels for marginalized communities require comprehensive solutions.
- Targeted Subsidies: Implement targeted subsidies for LPG cylinders to make them more affordable for rural and below-poverty-line communities. These subsidies can be based on income levels or geographic locations to ensure that those most in need receive assistance.
Mains PYQ:
Q In what way could replacement of price subsidy with direct benefit Transfer (DBT) change the scenario of subsidies in India? Discuss.(UPSC IAS/2015)
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The Clean Energy Transition has become messy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Major Global happenings; USA and European countries;
Mains level: Sustainable Development; Issues with the Petroleum Industry in the Global Market;
Why in the news?
The war in the Middle East, Russia, and Ukraine, and sanctions by the US have eventually resulted into a fragmented market in the petroleum industry.
Causes of Fragmentation in the Petroleum Industry:
- Impact of Sanctions: The sanctions imposed by the US on countries like Venezuela, Iran, and Russia have led to a fragmentation of the petroleum market, with trading relations becoming more regional than global. This fragmentation has reshaped the dynamics of oil supply and demand, with different regions relying on specific suppliers based on geopolitical circumstances and sanctions
- Regional Trading Patterns: Trading relations in the petroleum industry have shifted regionally, with the US emerging as a major supplier of LNG and products in Europe, Russia becoming the largest supplier of crude to India, and Iran focusing on exports to China despite Western sanctions. This regionalization of trade has altered traditional market dynamics and diversified supply chains.
- Challenges Faced by Oil Companies: International petroleum majors are experiencing solid profits due to higher production and prices of oil and gas. However, they are confronted with the need to reconcile their investment strategies with net zero carbon emission targets. This balancing act poses a significant challenge for oil companies as they navigate between profitability and sustainability goals
- Geopolitical Uncertainties: The ongoing conflicts in the Middle East, particularly between Israel and Iran, have added to the complexities of the petroleum market. The region, which holds a significant portion of the world’s petroleum reserves, is facing a mix of warfare, racism, and radicalism, contributing to heightened tensions and uncertainties in the oil industry
- AI Industry’s Energy Demand: Increasing energy demand from the artificial intelligence (AI) industry for data centers, cloud storage facilities, and crypto mining. This growing demand for electricity poses a challenge as renewables may not be able to meet the requirements, leading to a dilemma for industry leaders committed to achieving net zero carbon emissions.
What needs to be done?
- Diversification of Energy Sources: To mitigate the impact of geopolitical uncertainties and sanctions-induced market fragmentation, there is a need for countries to diversify their energy sources.
- Strengthening Regional Cooperation: Regional cooperation agreements and partnerships can help stabilize petroleum markets and ensure energy security.
- Promotion of Energy Efficiency: Improving energy efficiency across various sectors, including transportation, manufacturing, and residential buildings, can reduce overall energy consumption and lessen dependence on petroleum products.
Mains PYQ:
Q Discuss the multi-dimensional implications of uneven distribution of mineral oil in the world. (UPSC IAS/2021)
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Centre Directs Gas-Based Power Plants To Begin Operations Amid Rising Summer Demand
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Status of Gas based plants in India; Section 11 (Electricity Act, 2003);
Mains level: Significance of Gas-Based Plants;
Why in the News?
- The Central government has issued directives under Section 11 of the Electricity Act, of 2003 to all gas-based generating stations to ensure Maximum Power Generation.
- This section empowers the Central/state government to specify the operation of generating stations in extraordinary circumstances.
Why India Needs Gas-based Plants?
- Electricity Demand in India: India faces a surge in electricity demand, especially during the upcoming summer season. The government has instructed gas-based power plants to commence operations to address this demand surge.
- Optimizing Power Availability: The directive aims to optimize power availability from gas-based generating stations during the anticipated high-demand period, similar to measures taken for imported-coal-based power plants.
- Ideal Transitioning Fuel: Gas-based power plants can be an ideal transition fuel for the shift from coal-based generation to renewable energy in the Indian power sector. They can provide the necessary flexibility and reliability to the grid as the share of renewable energy increases.
- Targets: The Indian government has set a target of increasing the share of non-fossil fuel, especially renewables, in power generation to 50% by 2030, and gas-based power plants can play a crucial role in achieving this target.
Challenges in building Gas-based Infrastructure:
- Underutilized Capacity: Despite having considerable capacity, gas-based generating stations remain underutilized, primarily due to commercial considerations.
- Non-availability of Affordable Fuel: India’s gas-based power plants are either stranded or operating at sub-optimal levels due to the non-availability of affordable fuel
- Lack of Domestic Gas Supply: The limited domestic gas supply has forced gas-based power producers to depend on LNG to meet their fuel needs, but the high cost of LNG has increased the variable cost of power, making it difficult to schedule in merit order dispatch
- Dependence on Imports: With barely half of the current gas consumption coming from local production, dependence on gas-based power plants can only be interim and not a long-term solution.
Initiatives taken by the Government:
- Setting up biogas plants: The Ministry of New and Renewable Energy, Government of India, launched the Biogas program to set up biogas plants for various applications, including power generation.
- Use of gas-based power for peaking and balancing: The government will use some gas-based power to meet the country’s peaking and balancing needs during the summer of 2024.
- Increasing gas-based power generation: The government wants the share of gas-based power to rise to 15% of India’s total installed power generation capacity.
Way forward:
- Diversification of fuel sources: Encourage the exploration and development of domestic gas reserves to reduce reliance on imported gas and mitigate price volatility.
- Investment in infrastructure: Develop infrastructure for transporting gas efficiently across the country to ensure a steady and reliable supply to power plants.
- Policy support: Provide long-term policy certainty and incentives for investment in gas-based power generation, including tax breaks, subsidies, and assured purchase agreements.
Mains PYQ
Q Environmental Impact Assessment studies are increasingly undertaken before a project is cleared by the Government. Discuss the environmental impacts of coal-fired thermal plants located at coal pitheads. (UPSC IAS/2014)
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How are hydrocarbons extracted from under the ground? | Explained
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hydrocarbons;
Mains level: The extraction of Hydrocarbons;
Why in the news?
The geological processes, extraction methods, and environmental impact of hydrocarbon extraction.
BACK2BASICSWhere are Hydrocarbons located?
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How Hydrocarbons are extracted?
The extraction of hydrocarbons, such as oil and gas, has several negative impacts on the environment:
- Damage to Marine Life and Ecosystems: The extraction process can lead to the release of toxic substances and chemicals, which can harm marine life and ecosystems. This can lead to the death of fish, birds, and other marine animals, as well as the destruction of habitats.
- Deforestation and Destruction of Flora: The search for hydrocarbon deposits often involves the clearing of large areas of land, which can lead to deforestation and the destruction of plant life. This can have a significant impact on local ecosystems and biodiversity.
- Water Pollution: The extraction process can lead to the contamination of groundwater and surface water.
- Destruction of Fertile Land: The extraction process can destroy fertile land, which can have serious consequences for agriculture and food production. This can lead to soil erosion, desertification, and the loss of biodiversity.
Renewable sources that can serve as alternatives for hydrocarbons include:
- Hydroelectricity: This is the most significant renewable energy source at 6% of the global total
- Solar Energy: Solar power is a promising renewable energy source that can be harnessed using solar panels to convert sunlight into electrical energy. The solar power development sector is the fastest-growing renewable energy sector in the U.S
- Wind Energy: Wind turbines can generate electricity from wind power, and this technology is becoming increasingly popular and efficient
- Biomass Energy: Biomass energy can be derived from organic materials such as wood, agricultural waste, and municipal solid waste.
- Geothermal Energy: Geothermal energy is generated and stored in the Earth’s crust. This energy source can be used for heating, cooling, and electricity generation
- Renewable Natural Gas (RNG): RNG is a pipeline-quality gas that can be utilized by utilities interchangeably with conventional natural gas. RNG can be produced from methane waste sources such as farm and landfills
Conclusion: Hydrocarbons, found in subterranean rock formations, are extracted using petroleum geology techniques. Extraction poses environmental risks like marine damage, deforestation, and water pollution. Renewable alternatives include hydroelectric, solar, wind, biomass, geothermal energy, and renewable natural gas.
Mains PYQ:
Q Do you think India will meet 50 percent of its energy needs from renewable energy by 2030? Justify your answer. How will the shift of subsidies from fossil fuels to renewables help achieve the above objective? Explain.
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[pib] National Green Hydrogen Mission
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Green Hydrogen Mission
Mains level: NA
Why in the news?
- The Ministry of New & Renewable Energy has unveiled Guidelines for the implementation of an R&D Scheme under the National Green Hydrogen Mission.
- The scheme aims to catalyze advancements in the production, storage, transportation, and utilization of green hydrogen, with a focus on affordability, efficiency, safety, and reliability.
Hydrogen Energy: A Backgrounder
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About National Green Hydrogen Mission (NGHM)
- The National Green Hydrogen Mission was launched in January 2023 to make India a ‘global hub’ for using, producing and exporting green hydrogen.
- Earlier, the National Hydrogen Mission was launched on August 15, 2021, with a view to cutting down carbon emissions and increasing the use of renewable sources of energy.
- The Ministry of New and Renewable Energy (MNRE) formulates the scheme guidelines for implementation of these missions.
Key features of the NGHM
- Power capacity: The mission seeks to promote the development of green hydrogen production capacity of at least 5 MMT per annum with an associated renewable energy capacity addition of about 125 GW in the country by 2030.
- Job creation: It envisages an investment of over ₹8 lakh crore and creation of over 6 lakh jobs by 2030.
- Reducing energy import bill: It will also result in a cumulative reduction in fossil fuel imports of over ₹1 lakh crore and abatement of nearly 50 MMT of annual greenhouse gas emissions by 2030.
- Export promotion: The mission will facilitate demand creation, production, utilisation and export of green hydrogen.
- Incentivization: Under the Strategic Interventions for Green Hydrogen Transition Programme (SIGHT), two distinct financial incentive mechanisms targeting domestic manufacturing of electrolysers and production of green hydrogen will be provided under the mission.
- Green Hydrogen Hubs: Regions capable of supporting large-scale production and/or utilisation of hydrogen will be identified and developed as Green Hydrogen Hubs.
Types of HydrogenHydrogen extraction methods are classified into three types based on their processes: Grey, Blue, and Green.
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PYQ:[2010]Hydrogen fuel cell vehicles produce one of the following as “exhaust”: (a) NH3 (b) CH4 (c) H2O (d) H2O2
[2023]With reference to green hydrogen, consider the following statements: 1. It can be used directly as a fuel for internal combustion. 2. It can be blended with natural gas and used as fuel for heat or power generation. 3. It can be used in the hydrogen fuel cell to run vehicles. How many of the above statements are correct? (a) Only one (b) Only two (c) All three (d) None |
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[pib] International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hydrogen Fuel Cell and its Working, IPHE
Mains level: Hydrogen as a alternate fuel
Why in the news-
- The 41st Steering Committee Meeting of the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE) is being convened in New Delhi.
- The IPHE Steering Committee Meetings held biannually serve as a crucial platform for fostering international collaboration and coordination among member countries, stakeholders, and decision-makers.
What is a Fuel Cell?
Working of a Hydrogen Fuel Cell
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About IPHE
- The IPHE was established in 2003 as an international inter-governmental partnership led by the US.
- It aims to accelerate progress in hydrogen and fuel cell technologies.
- IPHE comprises 21 member countries and the European Commission as a non-voting member.
- Member countries include major economies such as the United States, Japan, Germany, China, South Korea, and Canada, among others including India.
- Additionally, the United Kingdom, Russia, and Singapore have also been mentioned in various contexts within the provided sources but are NOT explicitly listed as members of IPHE.
Objectives of the IPHE
- Faster Transition: IPHE aims to facilitate and accelerate the transition to clean and efficient energy and mobility systems using hydrogen and fuel cell technologies across different applications and sectors.
- Information Sharing Platform: The partnership provides a platform for sharing information on member country initiatives, policies, technology status, safety, regulations, codes, standards, and outreach efforts.
- Advancing Clean Hydrogen Technologies: IPHE promotes a sustainable future by highlighting the versatility of hydrogen in various industries and its role in decarbonizing energy systems.
Key Initiatives: H2-DEIA Platform
- In 2023, IPHE announced the launch of the H2-DEIA platform in partnership with the Hydrogen Council.
- It is dedicated to advancing diversity, equity, inclusion, and accessibility (DEIA) within the hydrogen and fuel cell economy.
- It aims to foster a diverse workforce, share best practices, and support workforce development in the hydrogen sector.
PYQ:
Q.With reference to ‘Fuel Cells’ in which hydrogen-rich fuel and oxygen are used to generate electricity, consider the following statements:
- If pure hydrogen is used as a fuel, the fuel cell emits heat and water as by-products.
- Fuel cells can be used for powering buildings and not for small devices like laptop computers.
- Fuel cells produce electricity in the form of Alternating Current (AC).
Which of the statements given above is/are correct? (CSP 2015)
- 1 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
Practice MCQ:
Regarding the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE), consider the following statements:
- IPHE is an international inter-governmental partnership based on the auspices of the United Nations.
- India is a member of IPHE.
Which of the given statements is/are correct?
- Only 1
- Only 2
- Both 1 and 2
- Neither 1 nor 2
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India’s First Cattle Dung-based Bio-CNG Station in Gujarat
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Cattle Dung-based Bio-CNG
Mains level: NA
In the news
- Nestled along the Deesa-Tharad highway in Gujarat’s Banaskantha district lies India’s pioneering gas-filling station, seemingly unremarkable at first glance.
- However, this station, powered by cattle and buffalo dung, marks a significant leap in renewable energy innovation.
Fuel Production from Dung: A Technological Marvel
- Innovative Concept: The ‘BioCNG’ outlet in Dama village of Deesa taluka stands as India’s sole gas-filling station utilizing cattle and buffalo dung.
- Daily Operations: The outlet serves 90-100 vehicles daily, selling 550-600 kg of gas generated from 40 tonnes of dung processed at an adjacent plant.
- Dung Utilization: Approximately 40,000 kg of dung are sourced daily from 2,700-2,800 animals belonging to 140-150 farmers residing within a 10 km radius of the plant.
Understanding the Dung-to-Fuel Process
- Biogas Production: Fresh dung, rich in methane and water, undergoes anaerobic digestion in a sealed vessel, yielding raw biogas.
- Purification Process: The raw biogas undergoes purification to remove impurities like CO2 and H2S, resulting in compressed biogas (CBG) suitable for vehicle use.
- Production Output: From 40 tonnes of dung, the plant generates 2,000 cubic meters of raw biogas containing 55-60% methane, 35-45% CO2, and 1-2% hydrogen sulphide (H2S) and moisture.
Dual Benefits: Fuel and Fertilizer
- Fuel Value: CBG is sold at the station for Rs 72/kg, offering a renewable and eco-friendly alternative to traditional fuels.
- Fertilizer Production: The process also yields bio-fertilizer, enriching soil health and providing an additional income stream for farmers.
- Fertilizer Sales: The Banaskantha Union markets 8,000-10,000 kg of bio-fertilizer daily, with phosphate-rich organic manure (PROM) fetching Rs 15-16/kg and compost Rs 8-10/kg.
Significance: Decentralized Model for Sustainable Agriculture
- Community Involvement: The initiative engages local farmers, who supply dung to the plant, fostering community participation and economic empowerment.
- Replicability and Scalability: The model holds potential for replication across districts and states, offering a scalable solution for energy and agricultural needs.
- Investment Plans: The Banaskantha Union plans to commission four additional 100-tonnes capacity plants by 2025, with a total investment of Rs 230 crore.
Conclusion
- The establishment of India’s first dung-based gas-filling station represents a significant stride towards renewable energy adoption and agricultural sustainability.
- As technology continues to evolve, decentralized models like these hold promise for transforming rural economies while mitigating environmental impact.
- With ongoing support and investment, such initiatives can pave the way for a greener and more resilient future.
Try this PYQ from CSE Prelims 2019:
Q.In the context of proposals to the use of hydrogen-enriched CNG (H-CNG) as fuel for buses in public transport, consider the following statements:
- The main advantage of the use of H-CNG is the elimination of carbon monoxide emissions.
- H-CNG as fuel reduces carbon dioxide and hydrocarbon emissions.
- Hydrogen up to one-fifth by volume can be blended with CNG as fuel for buses.
- H-CNG makes the fuel less expensive than CNG.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 4 only
(d) 1, 2, 3 and 4
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How LPG subsidy can be redesigned to privilege low-income households
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Pradhan Mantri Ujjwala Yojana (PMUY)
Mains level: challenges faced by low-income households in India in accessing LPG
Central Idea:
The article highlights the challenges faced by low-income households in India in accessing LPG refills despite government subsidies under the Pradhan Mantri Ujjwala Yojana (PMUY). It suggests reforms to the existing subsidy program to make it more effective, including on-time subsidy transfers and the use of digital payment solutions.
Key Highlights:
- The Pradhan Mantri Ujjwala Yojana (PMUY) aims to provide LPG access to low-income households in India.
- Despite subsidies, many households still rely on biomass for cooking due to liquidity constraints.
- Existing subsidy policies have evolved rapidly, but they may not adequately address the needs of PMUY households.
- Data analysis reveals that PMUY consumers are sensitive to the amount and timing of refill subsidies.
- Upfront subsidies, like those provided during the Pradhan Mantri Garib Kalyan Yojana (PMGKY), can significantly increase LPG usage.
- Fin-tech solutions, such as electronic subsidy transfers and digital vouchers, can alleviate the financial burden of refill purchases.
Key Challenges:
- Ensuring subsidy benefits reach the intended beneficiaries without leakage.
- Addressing liquidity constraints faced by low-income households.
- Educating households about subsidy timing and logistics.
- Overcoming credit constraints, especially for daily wage earners.
- Implementing digital payment solutions effectively in rural areas.
Main Terms or keywords for answer writing:
- LPG (Liquefied Petroleum Gas)
- PMUY (Pradhan Mantri Ujjwala Yojana)
- PAHAL (Pratyaksh Hanstantrit Labh)
- PMGKY (Pradhan Mantri Garib Kalyan Yojana)
- Fin-tech (Financial Technology)
- e-RUPI (Electronic Rupee)
Important Phrases for quality enrichment of mains answer:
- Liquidity constraint
- Direct benefit transfer
- Upfront subsidy
- Digital voucher
- Electronic payment
- Delayed subsidy transfer
Quotes for value addition:
- “Low-income households are sensitive to the amount and timing of refill subsidy.”
- “An upfront subsidy transfer can increase the demand for LPG refills significantly.”
- “Digital payment solutions hold promise in alleviating the financial burden of refill purchases.”
Anecdotes:
- The Pradhan Mantri Garib Kalyan Yojana (PMGKY) saw a spike in LPG consumption among low-income households during the period of upfront subsidy provision.
Useful Statements:
- “Ensuring subsidy benefits reach the intended beneficiaries without leakage is crucial for the success of LPG subsidy programs.”
- “Digital payment solutions can address liquidity constraints and improve access to LPG refills for low-income households.”
Examples and References:
- Data from Indore district reveals the sensitivity of PMUY consumers to refill market prices and subsidy amounts.
- The success of the Pradhan Mantri Garib Kalyan Yojana (PMGKY) in increasing LPG usage among low-income households serves as a relevant example.
Facts and Data:
- Before PMUY, a high percentage of rural households in India used biomass for cooking.
- PMUY households have lower LPG refill consumption compared to non-PMUY households.
- A significant increase in refill subsidy decreases monthly consumption by about 25% for PMUY consumers.
Critical Analysis:
- The article effectively identifies the challenges hindering the effectiveness of LPG subsidy programs for low-income households.
- It provides data-driven insights into consumer behavior and the impact of subsidy policies.
- The proposed fin-tech solutions offer practical approaches to address liquidity constraints and improve subsidy delivery.
Way Forward:
- Implement electronic payment solutions and digital vouchers to facilitate on-time subsidy transfers.
- Educate households about subsidy timing and logistics to improve awareness.
- Continuously monitor and evaluate subsidy programs to ensure effectiveness and address any emerging challenges.
- Collaborate between government ministries, fin-tech companies, and local stakeholders to implement reforms successfully.
By addressing these challenges and implementing innovative solutions, India can enhance LPG access for low-income households and accelerate its energy transition goals.
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India to be biggest driver of global oil demand beyond China by 2027: IEA
Note4Students
From UPSC perspective, the following things are important :
Prelims level: International Energy Agency (IEA)
Mains level: Read the attached story
Introduction
- India’s burgeoning economy is poised to become a significant player in global oil demand, with projections indicating that it will outpace China by 2027.
- The International Energy Agency (IEA) forecasts robust growth in India’s oil demand, driven primarily by industrial expansion and increasing mobility.
About International Energy Agency (IEA)
| Details | |
| Nature | Autonomous inter-governmental organisation within the OECD framework |
| Mission | Works with governments and industry to shape a secure and sustainable energy future for all |
| Establishment | Founded in 1974 to ensure the security of oil supplies |
| Origin | Created in response to the 1973-1974 oil crisis |
| Membership | Consists of 31 member countries and eleven association countries |
| Criteria for Membership |
|
| India’s Membership | Joined as an Associate member in 2017 |
| Key Reports Published | World Energy Outlook, World Energy Balances, Energy Technology Perspectives, World Energy Statistics, Net Zero by 2050. |
India’s Projected Growth in Oil Demand
- Dominance in Oil Demand Growth: India is expected to surpass China as the biggest driver of global oil demand growth by 2027, according to the IEA.
- Magnitude of Increase: The IEA projects an increase of nearly 1.2 million barrels per day (bpd) in India’s oil demand by 2023, contributing to over a third of the global demand growth by the end of the decade.
- Key Drivers: Diesel consumption emerges as the primary driver of India’s oil demand growth, accounting for nearly half of the nation’s demand rise and a significant portion of global demand growth.
- Sectoral Analysis: While jet-kerosene demand is expected to grow substantially, petrol demand is projected to increase moderately due to the electrification of India’s vehicle fleet.
Factors Influencing Demand Growth
- Impact of EVs and Biofuels: Increased penetration of electric vehicles (EVs), energy efficiency measures, and growth in biofuels consumption are anticipated to mitigate around 500,000 bpd of additional oil demand by 2030.
- Role of EVs: EV penetration alone is projected to displace 200,000 bpd of oil demand by 2030.
Why such a forecast for surge?
- Rising Crude Oil Imports: India’s crude oil imports are expected to surge by over a fourth to 5.8 million bpd by 2030, driven by robust demand growth and declining domestic production.
- Limited Domestic Production: Despite efforts to attract foreign investment, domestic crude oil production is projected to decline steadily, further increasing import dependence.
- Strategic Petroleum Reserves (SPRs): India is enhancing its capacity to respond to oil supply disruptions through strategic petroleum reserves.
- Importance of SPRs: These reserves help mitigate the impact of emergencies on energy supplies and ensure oil resilience in case of market disruptions.
Major Policy Initiatives for Oil Import Cut
- Urja Sangam 2015: In March 2015, the PM inaugurated ‘Urja Sangam 2015,’ aiming to boost India’s energy security. Stakeholders were urged to increase domestic oil and gas production to reduce import dependence from 77% to 67% by 2022 and further to 50% by 2030.
- Production Sharing Contract (PSC) Regime: The government introduced policies like PSC, Discovered Small Field Policy, Hydrocarbon Exploration and Licensing Policy (HELP), and New Exploration Licensing Policy (NELP) to incentivize domestic production.
- Ethanol Blending Programme (EBP): India promotes the EBP to reduce crude oil imports, cut carbon emissions, and boost farmers’ incomes. The target for 20% ethanol blending in petrol (E20) was advanced to 2025 from 2030, expediting ethanol adoption as an alternative fuel.
Way Forward
- Diversification Strategies: India must focus on diversifying its energy mix and promoting alternative fuels to reduce reliance on oil imports.
- Investment in Renewable Energy: Accelerated investment in renewable energy sources such as solar and wind power can mitigate the growth in oil demand and enhance energy security.
- Policy Initiatives: Robust policy measures are essential to incentivize energy efficiency, promote electric mobility, and encourage sustainable practices in the transport sector.
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SIGHT Program for Green Hydrogen Transition
Note4Students
From UPSC perspective, the following things are important :
Prelims level: SIGHT Program
Mains level: Read the attached story
Introduction
- The Union Ministry of New and Renewable Energy (MNRE) has embarked Strategic Interventions for Green Hydrogen Transition (SIGHT) Programme within the National Green Hydrogen Mission.
SIGHT Programme: An Overview
- Mission Alignment: SIGHT is an integral component of the National Green Hydrogen Mission, strategically designed to foster domestic electrolyser manufacturing and green hydrogen production.
- Financial Commitment: A substantial investment of Rs 17,490 crore has been allocated to SIGHT until 2029-30.
- Dual Incentive Mechanisms: SIGHT introduces two distinct financial incentive mechanisms:
-
- Incentive for Electrolyser Manufacturing: To boost the production of essential electrolysis equipment.
- Incentive for Green Hydrogen Production: Encouraging the generation of clean and sustainable green hydrogen.
- Adaptive Evolution: The incentive schemes and programs will evolve in response to market dynamics and technological advancements, ensuring the Mission’s adaptability.
- Execution Authority: The Solar Energy Corporation of India (SECI) is entrusted with executing the scheme, driving its effective implementation.
About National Green Hydrogen Mission
- Strategic Implementation: Launched by the MNRE, the mission commits an outlay of ₹ 19,744 crore from FY 2023–24 to FY 2029–30.
- Global Hub for Green Hydrogen: The overarching aim is to position India as a global hub for the production, utilization, and export of green hydrogen and its derivatives.
- Vision for 2030:
-
- Production Capacity: India’s green hydrogen production capacity is projected to reach 5 million metric tons (MMT) per annum, diminishing fossil fuel imports and saving ₹1 lakh crore by 2030.
- Economic Impact: The mission anticipates attracting over ₹8 lakh crore in investments and generating employment for more than 6 lakh people.
- Carbon Emission Reduction: A targeted production and utilization of green hydrogen is expected to avert nearly 50 MMT per annum of CO2 emissions.
- Pilot Projects: The Mission encompasses support for pilot initiatives in low-carbon steel, mobility, shipping, and ports.
- Flexible Allocations: The Mission allocates resources for various sub-components like SIGHT, pilot projects, research and development (R&D), enabling the funding of selected projects.
- State-Wide Impact: While the Mission has no state-wise allocation, its broad scope promises nation-wide benefits.
Significance of Green Hydrogen
- Eco-Friendly Production: Green hydrogen is produced through electrolysis, splitting water into hydrogen and oxygen using renewable energy sources like solar, wind, or hydropower.
- A Sustainable Fuel: This process yields a clean, emission-free fuel with immense potential to supplant fossil fuels and mitigate carbon emissions.
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India’s First Oil Production in Krishna-Godavari Basin
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Krishna-Godavari Basin
Mains level: Read the attached story
Introduction
- Oil and Natural Gas Corporation (ONGC) commenced its ‘first oil production’ from the deep-water block in the Krishna Godavari (KG) basin off the Bay of Bengal on the Kakinada coast.
First Crude Oil Production: Significance
- Location: The oil extraction is taking place 30 kilometres off the coast of Kakinada, in the Krishna Godavari basin.
- Initial Production Phase: Currently, four out of 26 wells are operational.
- Production Forecast: By May or June, the production is expected to reach 45,000 barrels per day, accounting for 7% of India’s total crude oil production.
- Gas Production Outlook: Alongside oil, the project also anticipates contributing significantly to India’s gas output.
About Krishna-Godavari Basin and its Natural Resources
| Details | |
| Location | Eastern coast of India |
| Geological Setting | Rift basin formed during the Mesozoic era |
| Sedimentary Fill | Primarily composed of sedimentary rocks |
| Tectonic Evolution | Went through phases of rifting, subsidence, and sedimentation |
| Stratigraphy | Includes Krishna Formation, Godavari Formation, Cauvery Formation, and more |
| Source Rocks | Organic-rich shales and mudstones |
| Reservoir Rocks | Typically sandstones and limestone formations |
| Trap Structures | Anticlines, fault traps, stratigraphic pinch-outs, and more |
| Major Discoveries | KG-D6 Block (Dhirubhai-1 and Dhirubhai-3 fields) |
| Exploration and Production | Companies like Reliance Industries, ONGC, GAIL, and others are active |
| Land Size | Approximately 15,000 square kilometers |
| Geomorphological Units | Upland plains, coastal plains, recent flood plains, and delta plains |
| Notable Gas Discovery | ONGC made the first gas finding in 1983 in the D-6 block, noted for India’s largest natural gas reserves |
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How the psychology of Benjamin Netanyahu, Joe Biden and MBS is driving oil prices
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Brent Oil
Mains level: impact of oil price fluctuations
Central idea
The article highlights the unpredictability of the international oil market, challenging conventional predictions due to a complex interplay of geopolitical, economic, and psychological factors. It underscores the significance of leaders’ personal challenges and decisions, particularly those of Netanyahu, Biden, and MBS, in shaping current market dynamics.
Key Highlights:
- Unpredictability of Oil Market: Predicting the international oil market is challenging due to factors beyond supply, demand, and geopolitics, including exchange rates, financial speculation, and human psychology.
- Recent Market Trends: Despite Middle East tensions, the oil price (Brent) did not sharply increase as expected, standing at $81 on December 1, influenced by factors like stable supply, new discoveries, and a slowdown in Chinese demand.
- Non-fundamental Drivers: The article argues that the current market conditions are shaped more by the psychology of key leaders, including Benjamin Netanyahu, Joe Biden, and Mohammed bin Salman, than the traditional fundamentals of demand and supply.
Key Challenges:
- Psychological Drivers: The dominant market drivers are identified as the personal challenges and state of mind of key leaders, potentially impacting their decisions in response to Middle East turmoil.
- Systemic Position vs. Personal Factors: While leaders hold a systemic position at the cross-section of geopolitics and geoeconomics, their current state of mind is considered more crucial in influencing the petroleum market.
Key Terms and Phrases:
- Brent Oil Price: Mention of the Brent oil price standing at $81 on December 1.
- Systemic Position: Leaders’ roles at the intersection of geopolitics and geoeconomics in the international oil market.
- Psychology of Leaders: The impact of the personal challenges and mental states of leaders like Netanyahu, Biden, and MBS on market dynamics.
Key Quotes:
- “Dominant drivers of market conditions today are not the fundamentals of demand and supply, but the non-fundamentals, the psychology of leaders.”
- “Might we not be experiencing the deceptive calm that precedes a volatile storm?”
Key Statements:
- Fundamentals vs. Non-fundamentals: The article questions whether the current market conditions are sustainable, highlighting the potential influence of leaders’ psychology over traditional supply and demand fundamentals.
- Deceptive Calm: Raises the possibility that the calm in the oil market may be deceiving, suggesting an impending volatile shift.
Key Examples and References:
- Recent Middle East Tensions: Refers to the attack by the Al Qassam brigade and the potential impact on oil prices, contrasting with the unexpected stable market conditions.
- US Troops Casualties: Hypothetical scenario of US troops being killed in Syria and Iraq, prompting debates on military responses with implications for oil prices.
Key Facts and Data:
- Oil Discoveries: Mentions recent oil discoveries in Brazil and Guyana, along with increasing US shale oil production.
- Chinese Economic Slowdown: Highlights the slowing demand for oil due to the slackening Chinese economy.
Critical Analysis:
- Leaders’ Influence: Emphasizes the potential impact of leaders’ personal challenges and decisions on the trajectory of the petroleum market, suggesting a shift from traditional market dynamics.
- Unpredictability of Oil Market: Acknowledges the difficulty in predicting the oil market, attributing it to a combination of fundamental and non-fundamental factors.
Way Forward:
- Contingency Actions: Encourages decision-makers to contemplate contingency actions based on two alternative scenarios: rising oil prices or a significant drop, suggesting strategic petroleum reserve buildup and streamlined trading norms for arbitrage opportunities in anticipation.
- Strategic Petroleum Reserves: Given the uncertainty in the oil market, India should accelerate efforts to build and expand its strategic petroleum reserves, providing a buffer against potential supply disruptions or price volatility.
- Strategic Collaboration: Explore collaborative efforts with key oil-producing nations to strengthen energy security, fostering partnerships that ensure stable and reliable oil supplies.
- Investment in Renewable Energy: Accelerate investments in renewable energy sources to reduce dependence on volatile oil markets, promoting sustainability and environmental conservation.
- Energy Efficiency Measures: Implement stringent energy efficiency measures across industries and sectors to mitigate the impact of oil price fluctuations and contribute to a more resilient energy landscape.
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Centre announces phased introduction of Biogas Blending for domestic use
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Biogas , Natural Gas, LPG
Mains level: Read the attached story
Central Idea
- The Centre plans to enhance its domestic energy sustainability by introducing mandatory blending of compressed biogas (CBG) with Natural Gas.
Mandatory Biogas Blending
This initiative aims to reduce the country’s reliance on natural gas imports and lower emissions.
- Initial Phase (April 2025): The mandatory blending of CBG with natural gas will begin at 1%. This blend will be suitable for use in automobiles and households.
- Progressive Increase (By 2028): The government plans to gradually increase the mandatory blending percentage to around 5% by 2028. This step will further reduce the dependence on pure natural gas.
Why such move?
- India is among the world’s largest importers of oil and gas, with nearly half of its gas consumption relying on imports.
- The blending initiative is designed to curb import costs and enhance energy security.
- These measures align with India’s broader objective of achieving net-zero emissions by 2070.
Comparative Analysis of Biogas, Natural Gas, and LPG
| Biogas | Natural Gas | LPG (Liquefied Petroleum Gas) | |
| Composition | Organic matter decomposition (mainly methane and CO2). | Fossil fuel (primarily methane). | Byproduct of natural gas processing (propane, butane). |
| Production | Anaerobic digestion of organic waste. | Extracted from underground, requires refining. | Obtained during natural gas processing and refining. |
| Energy Content | Lower due to high CO2 content. | High, efficient for heating and power. | High per volume, efficient in liquefied state. |
| Environmental Impact | Renewable, carbon-neutral. | Cleaner than coal/oil, but emits greenhouse gases. | Fewer pollutants than gasoline/diesel, emits greenhouse gases. |
| Uses | Heating, electricity, vehicle fuel, cooking in rural areas. | Heating, electricity, industrial processes, vehicle fuel. | Heating, cooking, vehicles, industrial applications. |
| Storage/Transport | Stored as gas or liquid; requires tanks. | Pipelines for gas; LNG for long-distance. | Pressurized tanks as liquid. |
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India’s Strategic Move: Reviving the Mozambique LNG Project
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Mozambique LNG Project
Mains level: NA
Central Idea
- Union Minister for Petroleum and Natural Gas recently undertook a significant diplomatic mission to review the $20 billion liquefied natural gas (LNG) project in Mozambique.
- This project, situated in the northern Cabo Delgado province, holds immense strategic importance for India’s quest for energy self-sufficiency.
Mozambique LNG Project
- Discovery in 2010: The project originated in 2010 with the discovery of substantial natural gas reserves off the northern Mozambique coast.
- Resource Abundance: The Area 1 block holds around 75 trillion cubic feet (Tcf) of recoverable gas, promising a resource life of about 120 years with an initial production rate of 12.88 million tonnes of LNG per year.
- Indian Involvement: Three Indian public sector undertakings (PSUs) hold a 30% stake in the Mozambique LNG project.
- Strategic Location: Mozambique’s geographical proximity to India’s west coast, with numerous LNG terminals, enhances its significance as a preferred source for LNG supply.
- Meeting Indian Demand: India aims to increase the share of natural gas in its energy mix, with LNG imports playing a crucial role. India currently imports approximately 50% of its natural gas needs.
Challenges and Recent Developments
- Operational Halt: TotalEnergies suspended project operations due to security concerns in April 2021.
- Humanitarian Assessment: A humanitarian mission was conducted by Jean-Christophe Rufin in December 2022, recommending actions to address local issues.
- Indian Diplomatic Efforts: India has actively sought to engage project partners and restart the project since May 2023.
- Geopolitical Significance: India’s reliance on Qatar as a major LNG supplier faces challenges, making the Mozambique LNG project strategically important.
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Indian Oil launches country’s first Reference Fuel
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Reference Grade Fuels
Mains level: Not Much
Central Idea
- India has marked a significant milestone in its quest for self-reliance with the commencement of ‘reference’ petrol and diesel production.
- This specialized fuel, crucial for automobile calibration and testing, has been indigenously developed by the Indian Oil Corporation (IOC), reducing the nation’s dependence on costly imports.
Understanding Reference Fuel
- Octane Number Distinction: Unlike regular and premium fuels with octane numbers of 87 and 91, reference-grade fuel boasts an impressive octane number of 97. The octane number measures the ignition quality of petrol or diesel.
- Stringent Specifications: ‘Reference’ petrol and diesel adhere to a host of stringent specifications, encompassing parameters like cetane number, flash point, viscosity, sulphur and water content, hydrogen purity, and acid number, as mandated by government regulations.
- Emission Testing: These specialized fuels are indispensable for emission testing of vehicles equipped with spark ignition engines.
Economic Significance
- Reduced Import Costs: While imported ‘reference’ fuel costs approximately Rs 800-850 per litre, domestic production slashes the cost to approximately Rs 450 per litre, providing a significant cost advantage.
- Critical for Auto Industry: ‘Reference’ fuels, characterized by higher specifications, are vital for calibrating and testing vehicles by automobile manufacturers and agencies such as the International Centre for Automotive Technology (ICAT) and the Automotive Research Association of India.
- Innovation by IOC: The Indian Oil Corporation (IOC) has achieved a breakthrough by creating indigenous alternatives, ensuring a dependable supply of reference fuel at a significantly lower cost to support vehicle manufacturers and testing agencies.
Indigenous Technical Prowess and Export Potential
- Boosting Make in India: The production of ‘reference’ fuel domestically underscores India’s indigenous technical capabilities, bolstering the Make in India initiative.
- Export Prospects: After catering to domestic demand, IOC intends to explore export opportunities for reference fuel.
Energy Security Strategy and Environmental Commitment
- Four-Pronged Energy Security: The Indian government has adopted a four-pronged energy security strategy to achieve energy independence by 2047. It involves diversifying energy supplies, expanding exploration and production, leveraging alternate energy sources, and embracing a gas-based economy, green hydrogen, and electric vehicles (EVs).
- Ethanol Blending: India has advanced the rollout of petrol blended with 20 percent ethanol to 2025, accelerating its commitment to reduce emissions. The target of 12 percent ethanol blending has been achieved, with plans to reach 20 percent by the end of 2025.
Conclusion
- India’s achievement in producing ‘reference’ fuel domestically is a testament to its technical prowess and commitment to self-reliance.
- This development not only reduces import costs but also bolsters the nation’s automotive industry and contributes to environmental sustainability.
- It reflects India’s dedication to the Aatmanirbhar Bharat mission, serving as a model for self-sufficiency in specialized sectors.
Back2Basics: Cetane vs. Octane Number
Cetane and octane numbers are measurements used to assess the ignition quality of fuels, particularly diesel and gasoline, respectively.
| Cetane Number | Octane Number | |
| Fuel Type | Diesel fuel | Gasoline (petrol) |
| Ignition Quality | Measures how quickly diesel fuel ignites | Measures resistance to knocking in gasoline |
| Scale Range | Typically ranges from 40 to 55 | Typically ranges from 0 to 100 |
| Higher Number | Indicates better ignition quality | Indicates better resistance to knocking |
| Combustion Characteristics | Higher cetane numbers lead to smoother and quieter diesel engine operation. | Higher octane numbers prevent knocking or pinging in gasoline engines. |
| Engine Compatibility | Important for diesel engines | Important for gasoline engines |
| Optimal Number | Depends on diesel engine design and application | Depends on gasoline engine design and compression ratio |
| Common Additives | Cetane improvers may be added to enhance ignition quality | Octane boosters may be added to prevent knocking |
| Significance in Fuel | Crucial for diesel engine performance | Vital for gasoline engine performance |
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Centre hikes LPG Subsidy for Ujjwala Beneficiaries to ₹300 per Cylinder
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Pradhan Mantri Ujjwala Yojana (PMUY)
Mains level: Not Much
Central Idea
- The Union Cabinet has approved an increase in the subsidy provided on LPG cylinders under the Ujjwala scheme, raising it from ₹200 to ₹300.
- The subsidy increase applies to up to 12 refills per year for beneficiaries.
Why such move?
- The decision to enhance the subsidy comes ahead of crucial Assembly elections in five states: Madhya Pradesh, Rajasthan, Telangana, Chattisgarh, and Mizoram.
Pradhan Mantri Ujjwala Yojana (PMUY)
- PMUY, introduced by the Ministry of Petroleum and Natural Gas, aims to provide clean cooking fuel, such as LPG, to rural and disadvantaged households, reducing their reliance on traditional fuels like firewood, coal, and cow dung cakes.
- Phases of PMUY:
- Phase I: Launched on May 1, 2016, with a target to release 8 Crore LPG connections by March 2020, achieving a significant increase in LPG coverage.
- Ujjwala 2.0: This phase aimed to release an additional 1 crore LPG connections, a target achieved in January 2022, subsequently expanded to release an additional 60 lakh LPG connections under Ujjwala 2.0.
Key Features
- Provides ₹1600 financial support for each LPG connection to Below Poverty Line (BPL) households.
- Offers deposit-free LPG connections, including the first refill and a free hotplate for beneficiaries.
- Benefits for beneficiaries include:
- Eligible beneficiaries receive a free LPG connection.
- Subsidy on the first six refills of 14.2 kg cylinders or eight refills of 5 kg cylinders.
- Option to use EMI facility for stove and first refill costs.
- Opportunity to join the PAHAL scheme for direct subsidy transfers to bank accounts.
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India and Saudi’s Push for the West Coast Mega Refinery Project
Note4Students
From UPSC perspective, the following things are important :
Prelims level: West Coast Mega Refinery Project
Mains level: Not Much
Central Idea
- India and Saudi Arabia have renewed efforts to accelerate the long-pending 60-million-tonnes-per-annum (60 mtpa) west coast mega refinery project, which had faced multiple hurdles.
West Coast Mega Refinery Project
- The ambitious project to build a mega oil refinery and petrochemicals facility in Maharashtra’s Konkan belt, with participation from Saudi Arabia and the UAE, was first proposed in 2015.
- The project is stipulated to be established at Barsu village in Ratnagiri district of Maharashtra.
- IOC, BPCL, and HPCL, had already incorporated a joint venture (JV) — Ratnagiri Refinery & Petrochemicals (RRPCL) — to implement the project.
- It faced resistance from locals due to environmental concerns and shifting political equations in the state.
- Despite initial agreements and cost estimates of Rs 3 lakh crore, the project failed to take off as foreign partners hadn’t acquired stakes in the joint venture.
Recent Developments
- Around 15,000 acres of land had to be acquired for the project across 17 villages in the area.
- A joint monitoring committee will track the project’s progress, signaling renewed commitment.
- India and Saudi Arabia are keen to implement the project, which has earmarked funds of $50 billion.
Significance of the Project
- India is a significant consumer of crude oil, and its demand for petroleum products and petrochemicals is expected to grow substantially.
- India aims to increase its refining capacity from 250 mtpa to 450 mtpa, making it a key player in the global oil demand landscape.
- For Aramco and ADNOC, the project offers diversification, global expansion, risk mitigation, and access to a major oil market.
Future Options
- Realistic alternatives include scouting for alternative coastal sites in Maharashtra or considering another coastal state.
- A more drastic alternative is to split the proposed mega refinery into smaller units.
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Drilling in the North Sea: History and environmental concerns
Note4Students
From UPSC perspective, the following things are important :
Prelims level: North Sea
Mains level: Read the attached story
Central Idea
- Recent endorsement by U.K. Prime Minister of plans for fresh fossil fuel drilling off Britain’s coast has sparked a debate among environmental experts.
- Amidst global concerns about climate change, the decision raises questions about the country’s commitment to sustainability and its impact on climate goals.
Evolution of North Sea Drilling
- Origins and Legislation: The North Sea drilling history dates back to the 1958 Geneva Convention on the Continental Shelf, which set the stage for exploration in the region.
- Continental Shelf Act: The U.K. Parliament’s enactment of the Continental Shelf Act in 1964 established the country’s jurisdiction over oil and gas resources beneath its seabed.
Milestones and Concerns in Drilling
- Early Exploration and Challenges: British Petroleum (BP) was granted the first exploration license in 1964, leading to natural gas discovery the following year.
- Forties Field Discovery: BP’s breakthrough commercial oil discovery in the Forties Field in 1970 marked a significant milestone.
- Expanding Operations and Safety Revamp: The following years witnessed increased exploration activities and installation of oil platforms. The Piper Alpha disaster in 1988 prompted crucial safety reforms.
Rationale and Concerns
- Government’s Position: In an official statement, the government justified the move as a strategy to enhance Britain’s energy independence.
- Environmental Alarm: However, environmental experts express apprehension, especially given the global push towards averting irreversible climate change.
North Sea Transition Authority and Offshore Licensing
- NTSA’s Role: The North Sea Transition Authority (NTSA) is responsible for regulating the oil, gas, and carbon storage sectors.
- Offshore Licensing Round: The NTSA is currently conducting the 33rd offshore oil and gas licensing round, aiming to award more than 100 licenses.
- Timing and Awards: The first licenses are expected to be granted in the autumn, furthering the expansion of drilling operations.
Shaping Geopolitical Energy Dependence
- Energy Security Concerns: The Prime Minister emphasized the necessity of domestic oil and gas sources, even as the country aims to reach net-zero emissions by 2050.
- Strategic Implications: The decision is portrayed as an effort to reduce reliance on oil and gas imports, which could originate from potentially unfavourable sources.
Ecological Concerns and Climate Impact
- Adverse Environmental Effects: Offshore drilling poses risks to workers, marine ecosystems, and climate health. It contributes to ocean warming, rising sea levels, and threatens marine biodiversity.
- Carbon Pollution Impact: Carbon pollution settling into oceans contributes to acidification, endangering coral reefs and shellfish.
Evaluating UK’s Climate Commitments
- Climate Change Committee Report: The Climate Change Committee (CCC) pointed out deficiencies in the U.K.’s preparations for climate change under the National Adaptation Programme.
- Adaptation Implementation: The CCC’s assessment highlighted a lack of substantial implementation of adaptation measures to address climate risks.
- Inconsistent with Paris Agreement: The Climate Action Tracker assesses the U.K.’s climate action as not fully aligned with the Paris Agreement.
- Long-Term Targets: The U.K.’s Nationally Determined Contributions (NDCs) and long-term targets do not reflect a fair share of global efforts to mitigate climate change.
- Incompatibility with Limits: Licensing new oil and gas extraction plans contradicts the 1.5°C temperature rise limit set by the Paris Agreement.
Conclusion
- The UK’s endorsement of offshore drilling reflects a complex balancing act between energy security, economic considerations, and environmental stewardship.
- As the world grapples with the imperative of combating climate change, the decisions made today hold the potential to shape the course of a sustainable future.
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OPEC+ decision on Oil Supply cut
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC+
Mains level: Global crude oil pricing dynamics
Central Idea
- Saudi Arabia has decided to decrease its oil supply to the global economy.
- This unilateral action aims to stabilize the declining crude oil prices.
- Previous efforts by major oil-producing countries within the OPEC+ alliance to cut supply did not yield desired price increases.
What is OPEC+?
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Reasons for OPEC+ Production Cuts
- Russian war: Oil prices rose significantly following Russia’s invasion of Ukraine.
- Previous major cut: The recent production cut is the largest since 2020 when OPEC+ members reduced outputs by 10 million barrels per day (bpd) during the Covid-19 pandemic.
- Benefit to Middle Eastern states: The cuts are expected to boost prices, benefiting Middle Eastern OPEC+ members who have become significant oil suppliers to Europe after sanctions were imposed on Russia.
Concerns for India
- Fuel price hike: Despite importing cheap Russian oil, India has not seen a decrease in fuel prices.
- Fiscal challenges: Rising oil prices pose fiscal challenges for India, where heavily-taxed retail fuel prices have reached record highs, threatening the demand-driven economic recovery.
- Reliance on West Asian supplies: India imports about 84% of its oil and depends on West Asian countries for over three-fifths of its oil demand.
- Potential impact on consumption-led recovery: India, as one of the largest crude-consuming countries, is concerned that production cuts by OPEC+ nations could undermine the country’s consumption-led economic recovery and negatively affect price-sensitive consumers.
Back2Basics: Organization of the Petroleum Exporting Countries (OPEC)
| Description | |
| Founding | September 14, 1960 |
| Member Countries | Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, Venezuela |
| Goal | Coordinate and unify petroleum policies among member countries, ensure stability and predictability in oil markets, secure fair returns on investment for member countries’ petroleum resources |
| Production Quotas | Set production limits for member countries to manage oil supply and stabilize prices |
| Market Monitoring | Monitor global oil market conditions, supply, demand, inventories, and prices |
| OPEC Meetings | Regular meetings held every six months for member countries to discuss and negotiate oil production and pricing policies |
| Pricing Policy | Historically used the “OPEC basket” concept – a weighted average price of crude oil blends produced by member countries |
| Influence on Prices | OPEC’s decisions and actions can impact global oil prices by increasing or decreasing production levels |
| Diminished Influence | OPEC’s influence on oil prices has reduced due to factors like the rise of non-OPEC oil production, changes in global energy markets, and geopolitical developments |
| Non-OPEC Cooperation | OPEC cooperates with non-OPEC countries, notably through the “OPEC+” group, which includes Russia, to collectively manage oil supply levels and enhance market stability |
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Oil Reserves in Salt Caverns: The Potential in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Salt Cavern-Based Reserves
Mains level: Strategic Oil Reserves in India
Central Idea
- Engineers India (EIL) is conducting a feasibility study for developing salt cavern-based strategic oil reserves in Rajasthan, India, to increase the country’s storage capacity.
- If successful, it would be India’s first oil storage facility using salt caverns, different from the existing rock cavern-based strategic storage facilities.
Cavern-based Oil Storage
- Cavern-based strategic oil storage facilities are storage facilities for crude oil or petroleum products that utilize naturally occurring underground caverns for storage purposes.
- These caverns are typically formed in salt formations or other geological formations through processes such as solution mining or excavation.
- In the case of salt cavern-based storage facilities, the storage space is created by dissolving salt deposits with water.
- The process involves pumping water into the geological formations with large salt deposits, which dissolves the salt and creates caverns.
- Once the brine (water with dissolved salt) is pumped out, the space can be used to store crude oil or other petroleum products.
Advantages offered
- Secure and safe: They are naturally well-sealed, providing a secure and impermeable barrier against liquid and gaseous hydrocarbons.
- Impermeable: This inherent sealing property makes them suitable for long-term storage of oil, minimizing the risk of leaks or environmental contamination.
- Efficient pumping: Furthermore, cavern-based storage facilities often have high injection and extraction rates, allowing for rapid and efficient operations.
- Huge capacity: The large volume capacity of caverns enables significant storage capacity, making them ideal for strategic oil reserves intended to address supply disruptions or emergencies.
- Strategic asset: Countries build strategic crude oil reserves to mitigate supply disruptions and ensure energy security during global supply shocks and emergencies.
India’s Current Strategic Oil Reserves
- Existing strategic oil storage facilities: India’s three current strategic oil storage facilities are located in Mangaluru, Padur, and Visakhapatnam, consisting of excavated rock caverns.
- Current capacity and days of demand met: India’s current strategic oil reserves have a capacity of 5.33 million tonnes, equivalent to around 39 million barrels, meeting approximately 9.5 days of demand.
- Expansion plans: India is in the process of expanding its strategic oil reserves by 6.5 million tonnes at Chandikhol in Odisha and Padur.
Salt Cavern-Based Reserves vs. Rock Cavern-Based Reserves
| Salt Cavern | Rock Cavern | |
| Development Process |
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| Advantages |
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| Suitability for Oil Storage |
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Examples of Salt Cavern-Based Storage
- US Strategic Petroleum Reserve: The US has the world’s largest emergency oil storage, with storage caverns created in salt domes along the Gulf of Mexico coast. It has a capacity of around 727 million barrels.
- Salt caverns for other purposes: Salt caverns are also used for storing liquid fuels, natural gas, compressed air, and hydrogen in various parts of the world.
Potential for such storage in Rajasthan
- Rajasthan’s conducive conditions: Rajasthan, with abundant salt formations, is seen as a favorable location for developing salt cavern-based strategic storage facilities.
- Previous plans and current renewal: Earlier plans for a strategic oil reserve in Bikaner did not materialize, but the exploration of salt cavern-based storage in Rajasthan can be seen as a renewed proposal.
- Infrastructure suitability: The presence of a refinery in Barmer and existing crude pipelines in Rajasthan make the infrastructure conducive for building strategic oil reserves.
- Importance of technology access: Previously, no Indian company possessed the necessary technical expertise for building salt cavern-based strategic hydrocarbon storage.
Future plans in India
- Emergency stockpiles: India’s strategic oil reserves are intended to provide emergency stockpiles and are managed by the Indian Strategic Petroleum Reserve (ISPRL).
- Import protection: The International Energy Agency (IEA) suggests that countries should hold oil stockpiles sufficient for 90 days of import protection.
- Commercialization plans and partnerships: India plans to commercialize its strategic petroleum reserves through public-private partnerships, reducing government spending and leveraging the commercial potential of the reserves.
- Recent actions and releases: India took advantage of low crude oil prices to fill its reserves, leading to cost savings. It also released oil from its strategic reserves as part of coordinated actions with other major oil-consuming countries.
Conclusion
- Compared to rock cavern-based reserves, salt caverns offer unique benefits that align with India’s goals of increasing storage capacity and ensuring energy security.
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Private: Oil Pipelines in India
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Oil and Gas Price Volatility: India’s Farsighted Governance
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Read the prelims box
Mains level: Oil and Gas policy, volatility and measures taken
Central Idea
- The present government has taken several measures to protect Indian consumers from international oil and gas price volatility. The recent Cabinet decision to approve a series of critical Administered Price Mechanism (APM) gas pricing reforms will further advance this objective. These reforms aim to protect Indians from extreme price volatility, promote more innovation and investments in exploration and production (E&P), and provide clarity for planned capex investments in gas-based sectors.
Reasons for oil and gas price volatility
- Global supply and demand: The balance between global supply and demand for oil and gas is a key factor in price volatility. If there is a surplus of supply, prices may decrease, while if there is a shortage of supply, prices may increase.
- Geopolitical tensions: Political tensions between countries, such as trade disputes or conflicts, can affect oil and gas prices. For example, if there is a threat of war or supply disruption in a major oil-producing country, prices may rise.
- Weather conditions: Extreme weather events, such as hurricanes or cold snaps, can impact oil and gas production and distribution, leading to price fluctuations.
- Economic growth: Economic growth can drive up demand for oil and gas, which can lead to higher prices. Conversely, economic slowdowns can reduce demand and lead to lower prices.
- OPEC decisions: The Organization of the Petroleum Exporting Countries (OPEC) plays a significant role in global oil prices by controlling production levels. Decisions made by OPEC, such as production cuts or increases, can affect prices.
Measures taken by the Indian government to protect consumers from oil and gas price volatility?
- Increasing domestic Administered Price Mechanism (APM) gas allocation: This step was taken to provide more clarity for planned capital expenditure investments in gas-based sectors and diverting gas from non-priority sectors to transport and domestic segments.
- APM gas pricing reforms: The recent Cabinet decision to approve a series of critical APM gas pricing reforms will further advance the objective of protecting Indian consumers from extreme price volatility. These reforms achieve two major goals: First, to protect Indians from extreme price volatility, and second, to promote more innovation and investments in exploration and production (E&P).
- Benchmarking APM prices: The government decided to insulate domestic gas consumers as well as national oil companies from such volatility by benchmarking APM prices to a slope of 10 per cent of Indian crude basket price to be determined on a monthly basis, together with a ceiling of $6.5/MMBTU and floor of $4.5/MMBTU for nomination fields.
- Reduction in fertiliser subsidies: After these reforms, the reduction in fertiliser subsidies is expected to be more than Rs 2,000 crore each year.
- Incentivising investment in the E&P sector: These reforms will also help incentivise investment in the E&P sector by providing a floor price for mature fields of nomination while also incentivising new wells of nomination fields which will receive 20 per cent higher prices.
- Expansion of gas pipeline network and CGD stations: Since 2014, India has increased the length of its gas pipeline network from 14,700 km to 22,000 km in 2023. The number of CGD-covered districts in India has increased from 66 in 2014 to 630 in 2023 while CNG stations have gone up from 938 in 2014 to 5,283 in 2023.
Facts for prelims
| Type of Oil/Gas | Production Process | Applications | Advantages | Disadvantages | Pollutants |
| Crude Oil | Extracted from oil wells through drilling | Transportation, fuel for power generation, industrial uses | High energy density, easy to transport | Air pollution, carbon emissions, oil spills | Carbon monoxide, nitrogen oxides, sulfur dioxide |
| Natural Gas | Extracted from gas wells through drilling or extracted alongside crude oil | Power generation, heating, cooking, industrial uses | Cleanest burning fossil fuel, high energy efficiency | Methane emissions, can leak during production and transportation | Carbon dioxide, nitrogen oxides |
| Liquefied Petroleum Gas (LPG) | Extracted during crude oil refining or extracted alongside natural gas | Cooking, heating, transportation | Clean burning, easy to store and transport | Non-renewable, carbon emissions during production and transportation | Carbon monoxide, nitrogen oxides |
| Compressed Natural Gas (CNG) | Extracted alongside crude oil or natural gas | Transportation, cooking | Lower emissions than petrol and diesel, cost-effective | Requires specialized vehicles and refueling stations, less energy-dense than petrol and diesel | Carbon monoxide, nitrogen oxides |
| Shale Gas | Extracted through hydraulic fracturing of shale rock formations | Power generation, heating, cooking, industrial uses | Abundant, reduces dependence on foreign oil, lower carbon emissions than coal | Requires large amounts of water, potential for groundwater contamination, methane leaks | Carbon dioxide, nitrogen oxides |
Way ahead for India’s oil and gas sector
- Encourage and promote domestic oil and gas production: The government should continue to incentivize domestic oil and gas production to reduce dependence on imports and minimize price volatility. This could be achieved by introducing more investor-friendly policies, simplifying regulations, and exploring untapped reserves.
- Develop a comprehensive energy policy: India needs to develop a comprehensive energy policy that outlines a clear vision for the sector’s development and growth. This policy should take into account environmental concerns, technological advancements, and future energy demands.
- Increase investment in infrastructure: The government should invest in building critical infrastructure like pipelines, terminals, and storage facilities to improve supply chain efficiency and reduce transportation costs. This will also enable the country to tap into more remote oil and gas reserves.
- Promote alternative sources of energy: Given the pressing need to reduce greenhouse gas emissions, India should promote alternative sources of energy such as solar, wind, and hydropower. This will not only help in meeting India’s climate goals but also reduce the dependence on fossil fuels.
- Improve pricing transparency: India should work towards improving pricing transparency in the oil and gas sector. This will help to ensure a level playing field for all players, promote healthy competition, and enable consumers to make informed decisions.
- Strengthen international partnerships: India should strengthen its partnerships with other countries, particularly those in the Gulf region, to ensure a stable supply of oil and gas. This will also help in diversifying sources of energy and reduce dependence on a few countries.
- Foster innovation: The government should incentivize research and development in the oil and gas sector to encourage innovation and promote the use of advanced technologies. This could help in improving extraction techniques, reducing environmental impact, and optimizing resource utilization.
Conclusion
- India’s efforts to protect its consumers from international oil and gas price volatility are commendable. The recent APM gas pricing reforms will further advance this objective and promote more innovation and investments in exploration and production (E&P) and provide clarity for planned capex investments in gas-based sectors. With a growing demand for natural gas, India is well on its way to realizing a gas-based economy as part of its broader energy transition goals. The vision of a cleaner, greener, and more sustainable energy future for India is steadily becoming a reality.
Mains question
Q. Discuss the factors behind Oil and gas sector being volatile. What are the measures taken by the Indian government to protect consumers from oil and gas price volatility?
Also read:
| What should India do in the current international energy market? |
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India’s sustainable jet fuel may get ASTM certified in 2023
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Sustainable Aviation Fuel (SAF), ASTM
Mains level: Green Fuel
Central idea
- The Indian Institute of Petroleum (IIP) has developed sustainable aviation fuel (SAF) using home-grown technology from cooking oil and oil-bearing plants.
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SAF is also being produced from non-petroleum-based renewable feedstocks, municipal solid waste, woody biomass, fats/greases/oils, and other feedstocks.
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About ASTM certification
- ASTM International is an international standards organization that develops and publishes technical standards for a wide range of materials, products, systems, and services.
- It was formerly known as the American Society for Testing and Materials and is based in the United States.
- The organization has over 30,000 members from more than 140 countries, including scientists, engineers, and industry professionals.
- The standards cover industries such as construction, petroleum, medical devices, and consumer products.
SAF under ASTM Certification
- Two of ASTM standards related to aviation fuel are ASTM D4054 and ASTM D7566.
- ASTM D4054 sets the requirements for qualifying aviation turbine fuels.
- ASTM D7566 sets the requirements for certifying fuels for use in commercial aviation.
Present use of SAF
- The Indian Air Force received provisional certification in November 2021 to use SAF on their test flights, subject to case-by-case approval by the aircraft manufacturer concerned.
- However, it is yet to be internationally certified for use in commercial airlines in India.
SAF production in India
- The Mangalore Refinery and Petrochemicals Ltd is setting up the first SAF plant, which is expected to come online by early 2025.
- However, two more SAF plants are expected to be set up by other refineries, probably by 2025-26.
- The Mangalore Refinery can produce 20 tonnes of SAF per day, meaning about 7,000 tonnes per year.
- However, to achieve even a per cent of blending of SAF in India, around 60,000 tonnes per year are required.
Way forward
- Demand for bio-jet fuel must be increased through a national policy, along the lines of the National Biofuel Policy, for it to be commercially scaled and to accelerate production.
- A nodal agency to implement this policy should be formed to bring together energy, transportation and agriculture sectors together under one roof.
- Mapping the sources of the various feedstock could aid this policy.
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Windfall Tax back on local crude oil
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Windfall Tax
Mains level: Not Much
The government has revised a windfall tax on domestically-produced crude oil. According to an official notification, the windfall tax rate of Rs 6,400 per tonne.
What is a Windfall Tax?
- Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event — for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
- These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
- The US Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
- One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.
Features of Windfall Tax
- Imposed on unanticipated and unearned gains: Windfall tax is imposed on the profits or gains that a company earns from external events or factors beyond their control, which they did not actively seek or pursue.
- One-time tax: It is typically imposed as a one-time tax retrospectively, over and above the normal rates of tax, and is not a regular or ongoing tax.
- Imposed on specific sectors or industries: Windfall taxes are usually imposed on specific sectors or industries where there is a significant increase in profits due to external factors such as price fluctuations, supply disruptions, or changes in regulations.
- Rationale for imposition: The imposition of windfall taxes is based on the rationale of redistributing unexpected gains, funding social welfare schemes, and creating a supplementary revenue stream for the government.
- Design problems: Introducing windfall taxes may suffer from design problems, given their expedient and political nature.
- Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.
When did India introduce this?
- In July 2022, India announced a windfall tax on domestic crude oil producers who it believed were reaping the benefits of the high oil prices.
- It also imposed an additional excise levy on diesel, petrol and air turbine fuel (ATF) exports.
- Also, India’s case was different from other countries, as it was still importing discounted Russian oil.
How is it levied?
- Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.
- The Central government has introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production, which was subsequently revised fortnightly four times so far.
- The latest revision was on August 31, when it was hiked to ₹13,300 per tonne from ₹13,000.
Reasons for re-introduction
- There have been varying rationales for governments worldwide to introduce windfall taxes like:
- Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
- Funding social welfare schemes, and
- Supplementary revenue stream for the government
Issues with imposing such taxes
- Design problems: Windfall taxes may suffer from design problems, given their expedient and political nature. There is also the issue of determining what constitutes true windfall profits and who should be taxed, which raises questions about the threshold for exemption of smaller companies.
- Potential impact on investment: Windfall taxes may lead to uncertainty in the market and negatively impact future investment, as companies may feel uncertain about investing in a sector with an unstable tax regime.
- Internalization of potential taxes: Introducing a temporary windfall profit tax may reduce future investment since prospective investors may internalize the likelihood of potential taxes when making investment decisions.
- Threshold for exemption of smaller companies: Determining the threshold for exemption of smaller companies raises questions about which companies should be taxed and what level of profit is normal or excessive.
- Difficulty in determining true windfall profits: There is also the issue of determining what constitutes true windfall profits, as it may be challenging to differentiate between profits attributable to external events versus those attributable to a company’s active investment strategy or business expansion.
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What do OPEC+ production cuts mean for India?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC+
Mains level: Crude oil price dynamics
OPEC+ countries announced a voluntary oil production cut of 1.16 million barrels per day, which could impact the Indian economy, which depends on oil imports for 85% of its energy needs.
Recent trend in crude oil prices
- Crude oil prices crashed in April 2020 due to the pandemic and recovered when economies opened up.
- Subsequently, prices rocketed in early 2022, but then the global economy slowed and a recession in advanced markets looms large.
- This has resulted in declining demand for crude oil from major economies, causing oil prices to start falling again.
What is OPEC+?
- OPEC+ is a group of oil-producing countries that cooperate to manage the global supply and prices of crude oil.
- It is made up of the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC countries, including Russia, Mexico, Kazakhstan, and others.
- OPEC was founded in 1960 by five countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- The organization’s primary objective was to coordinate and unify petroleum policies among member countries to secure fair and stable prices for petroleum producers and a regular supply for consumers.
Key functions of OPEC+
- Oil Production Regulation: OPEC+ regulates oil production of its member countries to ensure that oil prices remain stable and there is no oversupply or undersupply of oil in the market.
- Price Control: It aims to control the price of crude oil by regulating the supply of oil to the market.
- Market Monitoring: OPEC+ closely monitors the global oil market to understand the demand and supply dynamics of oil.
- Coordination: OPEC+ member countries work together to make decisions on oil production levels, pricing policies, and other matters that impact the global oil market.
- Research and Development: OPEC+ invests in research and development to explore new technologies and methods that can help member countries to produce oil more efficiently and sustainably.
Reason behind recent production cuts
- OPEC+ countries aim to support market stability by reducing oil supplies.
- The recent production cuts, totalling 3.7% of global demand, will raise crude oil prices per barrel and help cover up the losses producer countries faced after prices crashed.
Impact on Indian economy
- India is the third-largest oil consumer and imports 85% of its total crude oil requirement.
- The cut could raise crude by $10/barrel, increasing import bill and worsening the current account deficit by around 0.4% of GDP.
- This will impact foreign exchange reserves and result in the depreciation of the rupee, which in turn can increase imported inflation.
Impact on common people
- If the rise in crude oil import bill is passed on to the public, it may lead to cost-push inflation as every economic activity gets affected by oil price movement.
- On the flip side, state-controlled oil marketing companies may be stopped from passing on the increased burden to consumers, further worsening the financial balance of the oil public sector units.
Alternatives for India
- India can turn to Russia for more supplies of cheap crude, but of late there has been a small decline in Russia’s share in India’s oil imports.
- As a long-term strategy, the government should focus on alternative energy sources and building better roads.
- The government should work on bringing petroleum products within the goods and services tax, and promote energy-efficient use of vehicles or an eco-driving culture.
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What is India-Bangladesh Friendship Pipeline (IBFP)?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: IBFP
Mains level: India-Bangladesh Energy Ties
Prime Minister and his Bangladeshi counterpart inaugurated a 131.5-kilometre-long India-Bangladesh Friendship Pipeline (IBFP) from Siliguri in North Bengal to Parbatipur in Banglaesh’s Dinajpur province.
India-Bangladesh Friendship Pipeline (IBFP)
- IBFP is a cross-border energy pipeline that connects Siliguri in West Bengal, India to Parbatipur in Dinajpur district of Bangladesh.
- It has a capacity of transporting 1 Million Metric Ton Per Annum (MMTPA) of High-Speed Diesel (HSD) from India to Bangladesh.
- The pipeline is aimed at enhancing energy cooperation between India and Bangladesh and strengthening people-to-people linkages between the two countries.
- The construction of the pipeline was started in September 2018.
Importance of IBFPL to Bangladesh
Ans. Looming energy crisis
- Bangladesh is facing a significant energy crisis that threatens to impede its growth.
- The country has frequent power cuts, even in the capital, Dhaka, which has had a negative impact on key export industries such as the ready-made garments sector.
- To address this problem, the Indian government has initiated several projects to help Bangladesh meet its growing energy demands.
- The IBFPL is one such project that will play a vital role in addressing the country’s energy deficit.
- The pipeline will transport diesel quickly into Bangladesh, thus ending the country’s reliance on importing petroleum product in oil tankers by road and rail from India.
Other projects to meet Bangladesh’s energy demands
- Maitree project: The US $2 billion worth project is being built under a concessional financing scheme offered by India to Bangladesh. The first unit of the Maitree Super Thermal Power Production in Bangladesh’s Khulna province is already supplying 660 MW to the country’s national grid.
- Power import: Bangladesh is also awaiting power from the Adani Group’s 1600 Megawatt thermal power station at Godda in Jharkhand. Talks are currently underway to import at least 600 MW of power from this plant to meet Bangladesh’s peak summer demand.
- BIFPCL: The two countries set up the Bangladesh India Friendship Power Company Limited (BIFPCL), a 50:50 joint venture between India’s National Thermal Power Corporation and Bangladesh Power Development Board. Once completed, this will be Bangladesh’s largest power plant.
Why is India helping Bangladesh?
Ans. To offset Bangladesh’s dependence on China
- India’s assistance to Bangladesh in meeting its energy needs is also aimed at offsetting that country’s dependence on China.
- Chinese investments in Bangladesh’s energy sector stand at US $8.31 billion.
- Beijing has also offered to help Bangladesh transition to renewable sources.
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What is Liquefied Natural Gas (LNG), and how it impacts the climate?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: LNG
Mains level: Not Much
The EU is weaning itself off piped Russian gas by rapidly expanding imports of liquefied natural gas (LNG) from US.
What is Liquefied Natural Gas or LNG?
- LNG is natural gas reduced to a liquid state (liquefaction) through intense cooling to around -161 degrees Celsius (-259 Fahrenheit).
- It is constituted almost wholly of methane — a potent greenhouse gas and can be transported around the world by ship.
- This liquid gas is 600 times smaller than the original volume and is half the weight of water.
- After arriving at its destination, the cargo is regasified in a floating terminal and redistributed through pipelines.
Economic feasibility of LNG
- High cost of liquefaction: despite LNG’s export potential, the high cost of liquefaction and producing LNG has limited its market.
- Losses: Between 10-25% of the energy of the gas is being lost during the liquefaction process.
- Costly transport: The cooling, liquefying and transport processes, as well as the post-transport regasification procedures, also require a lot of energy.
What’s the climate impact of LNG?
- Emission: With LNG creating almost 10 times more emissions than piped gas by one estimate, its rapid expansion will likely compromise climate targets.
- Risks of methane leakages: Methane loss across the supply chain risks also contributes to LNG’s high emissions.
- Huge carbon equivalence: Meanwhile, LNG emits 14 times as much carbon as solar power when producing the equivalent amount of energy, and 50 times as much carbon as wind power.
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Centre clears National Green Hydrogen Mission
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Green Hydrogen Mission
Mains level: Read the attached story
The Union Cabinet approved the National Green Hydrogen Mission, which is aimed at making India the global hub for the production of green hydrogen.
What is Green Hydrogen?
- Green hydrogen is hydrogen gas produced through the electrolysis of water.
- It is an energy-intensive process for splitting water into hydrogen and oxygen— using renewable power to achieve this.
- The current cost of green hydrogen in India is ₹300 to ₹400 per kg.
Green Hydrogen Mission
- The National Hydrogen Mission was launched on August 15, 2021, with a view to cutting down carbon emissions and increasing the use of renewable sources of energy.
- The Ministry of New and Renewable Energy (MNRE) will formulate the scheme guidelines for implementation.
Key features
- Power capacity: The mission seeks to promote the development of green hydrogen production capacity of at least 5 MMT per annum with an associated renewable energy capacity addition of about 125 GW in the country by 2030.
- Job creation: It envisages an investment of over ₹8 lakh crore and creation of over 6 lakh jobs by 2030.
- Reducing energy import bill: It will also result in a cumulative reduction in fossil fuel imports of over ₹1 lakh crore and abatement of nearly 50 MMT of annual greenhouse gas emissions by 2030.
- Export promotion: The mission will facilitate demand creation, production, utilisation and export of green hydrogen.
- Incentivization: Under the Strategic Interventions for Green Hydrogen Transition Programme (SIGHT), two distinct financial incentive mechanisms targeting domestic manufacturing of electrolysers and production of green hydrogen will be provided under the mission.
- Green Hydrogen Hubs: Regions capable of supporting large-scale production and/or utilisation of hydrogen will be identified and developed as Green Hydrogen Hubs.
Hydrogen Energy: A Backgrounder
- Hydrogen is an important source of energy since it has zero carbon content and is a non-polluting source of energy in contrast to hydrocarbons that have net carbon content in the range of 75–85 per cent.
- Hydrogen energy is expected to reduce carbon emissions that are set to jump by 1.5 billion tons in 2021.
- It has the highest energy content by weight and lowest energy content by volume.
- As per International Renewable Energy Agency (IRENA), Hydrogen shall make up 6 per cent of total energy consumption by 2050.
- Hydrogen energy is currently at a nascent stage of development, but has considerable potential for aiding the process of energy transition from hydrocarbons to renewable.
Why hydrogen?
- Better properties: At standard temperature and pressure, hydrogen is a nontoxic, nonmetallic, odourless, tasteless, colourless, and highly combustible diatomic gas.
- Clean fuel: Hydrogen fuel is a zero-emission fuel when burned with oxygen. It can be used in fuel cells or internal combustion engines. It is also used as a fuel for spacecraft propulsion.
- Ample sources: Hydrogen can be sourced from natural gas, nuclear power, biomass, and renewable power like solar and wind.
- Phasing out carbon: India remains committed to environmental and climate causes with a massive thrust on deploying renewable energy and energy efficiency measures.
- Diversification of our energy basket: This would be the key lever enabling this transition. That’s why the emergence of hydrogen at the centre stage is a welcome development.
How Hydrogen can be produced?
Commercially viable Hydrogen can be produced from –
- Hydrocarbons including natural gas, oil and coal through processes like steam methane reforming, partial oxidation and coal gasification
- Renewables like water, sunlight and wind through electrolysis and photolysis and other thermo-chemical processes.
How is Green Hydrogen produced?
- For source material, green hydrogen today is typically generated from water through a process known as electrolysis, which uses an electric current to split water into its component molecules of hydrogen and oxygen.
- This is done using a device called an electrolyzer, which utilizes a cathode and an anode (positively and negatively charged electrodes).
- This process produces only oxygen – or steam – as a by-product.
- As for energy supply, to qualify as “green hydrogen,” the source of electricity used for electrolysis must derive from renewable power, such as wind or solar energy.
- Currently the production of green hydrogen is two or three times more expensive than blue hydrogen.
How can green hydrogen be used?
Hydrogen can be used in broadly two ways. It can be burnt to produce heat or fed into a fuel cell to make electricity.
- Fuel-cell Mobility: Hydrogen electric cars and trucks
- Container ships powered by liquid ammonia made from hydrogen
- “Green steel” refineries burning hydrogen as a heat source rather than coal
- Hydrogen-powered electricity turbines that can generate electricity at times of peak demand to help firm the electricity grid
Challenges in producing Green Hydrogen
India’s transition towards a green hydrogen economy (GHE) can only happen once certain key issues are addressed.
- Supply-Chain Issues: GHE hinges upon the creation of a supply chain, starting from the manufacture of electrolysers to the production of green hydrogen, using electricity from a renewable energy source.
- Technology: Green hydrogen needs electrolysers to be built on a scale larger than we’ve yet seen.
- Storage: Either very high pressures or very high temperatures are required, both with their own technical difficulties.
- Explosion Hazard: It is hazardous because of its low ignition energy and high combustion energy.
- Risk to use: Automotive fuels are highly inflammable, but a vehicle laden with hydrogen is likely to be more vulnerable in case of a major accident.
- High Cost of Production: To become competitive, the price per kilogram of green hydrogen has to reduce to a benchmark of $2/kg. At these prices, green hydrogen can compete with natural gas.
- Energy intensivity: Creating green hydrogen needs a huge amount of electricity, which means an enormous increase in the amount of wind and solar power to meet global targets.
- Lack of proper infrastructure, only 500 Hydrogen stations exist globally. Only countable manufacturers are involved as market players in this technology.
- Others: Low user acceptance and social awareness. Developing after-sales service for hydrogen technology.
Policy and Economic Challenges
- Economic sustainability: One of the biggest challenges faced by the industry for using hydrogen commercially is the economic sustainability of extracting green or blue hydrogen.
- Technological challenges: The technology used in production and use of hydrogen like Carbon Capture and Storage (CCS) and hydrogen fuel cell technology are at nascent stage.
- Cost Factor: These technologies are expensive which in turn increases the cost of production of hydrogen and will require a lot of investment which in turn add fiscal pressure on government.
- Higher Maintenance costs: Maintenance costs for fuel cells post-completion of a plant can be costly.
- Need for legal and administrative adherence: Certification mechanisms, recommendations, and regulations for different components of the system.
Way forward
- Hydrogen energy is at a nascent stage of development but has significant potential for realizing the energy transition in India.
- The new policy is a futuristic vision that can help the country not only cut down its carbon emissions but also diversify its energy basket and reduce external reliance.
- India’s transition can be a testament to the world on the achievement of energy security, without compromising the goal of sustainable development.
- The GoI must strongly pursue the objective of creating a GHE to make India a global manufacturing hub and place itself at the top of the green hydrogen export market.
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What should India do in the current international energy market?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: International energy market, decarbonatization and Challenges in front of India
Context
- India marches ahead carrying the same challenge projected as last year that it will have to navigate the choppy waters of a volatile petroleum market without straying from the green path towards clean energy. Energy security cannot be achieved by focusing only on the supply and distribution side of the equation. The demand conservation and efficiency sides are equally important.
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Current situation of international energy market
- Fragmented energy market: the energy market has fragmented and energy nationalism is the driving force behind policy.
- Restricted markets for Russia: Irrespective of how and when the Ukraine conflict ends, Russia will not be allowed access to the western markets for as long as President Putin is at the helm of the affairs. One fallout is the tightening energy embrace between Russia and China.
- Declining western orbit and increasing non-aligned approach: Three, OPEC plus one which is, in effect, Saudi Arabia plus Russia has stepped outside the Western orbit. Saudi Arabia has made clear it intends to pursue a Saudi first, non-aligned approach to international relations including with the US.
- Emergence of new energy centres: The new centres of energy power are emergent around countries that have a large share of the metals, minerals and components required for clean energy. China is currently the dominant power.
What should India do against this backdrop?
- Government must increase productivity of existing sources: Discounted Russian crude is an opportunistic panacea. It does not provide a sustainable cover to meet our requirements. To secure such a cover, government must increase the productivity of our existing producing fields; additional resources should be allocated for accessing relevant enhanced oil recovery technologies.
- Secure long- term supply relationship with Saudi Arabia and Iran: Further, it should leverage the country’s market potential to secure a long-term supply relationship with Saudi Arabia and an equity partnership with Iran.
- Enhance the strategic petroleum reserves: It should enhance the strategic petroleum reserves to cover at least 30 days of consumption and remove the sword of Damocles that the CBI/CVC/CAG wield over the heads of the public sector petroleum companies so that their traders can, without fear, take advantage of market volatility.
- Expediate gas pipeline grid: The construction of a pan-India national gas pipeline grid should be expedited.
Analysis: Phasing out coal and the energy transition in India
- Coal one of the major sources of energy in India: Coal will remain the bulwark of India’s energy system for decades. It is no doubt the dirtiest of fuels, but it remains amongst, if not the cheapest, source of energy. Plus hundreds of thousands depend on the coal ecosystem for their livelihood.
- Phasing out is not yet a near possibility: The option of phasing out coal whilst environmentally compelling is not yet a macroeconomic or social possibility.
- Need a balance: In the interim, the government has to find an energy transition route that balances livelihoods and pushes forward the green agenda.
- Steps to be taken: Some small, politically feasible steps in that direction would include increased R&D expenditure for coal gasification and carbon capture and sequestration technologies; setting a carbon tax; the establishment of regulatory and monitoring mechanisms for measuring carbon emissions from industry; the closure of inefficient and old plants and a decision not to approve any new ones.
- Determining competitiveness: In parallel, it would help if Niti Aayog were to pull together a group of economists and energy experts to determine the competitiveness of coal versus solar on a full-cost basis
Other possible measures
- Upgrading the transmission grid: Allocation of funds for upgradation of the transmission grid network to render it resilient enough to absorb clean electrons on an intermittent basis. The sun does not shine at night and the wind does not blow all the time. In parallel, the underlying structural issues currently impeding the scaling up of renewables must be addressed.
- Repairing the balance sheets of discoms through various regulatory reforms: In parallel, the repair of the balance sheets of state distribution companies (discoms), easing the procedures for the acquisition of land and the removal of regulatory and contract uncertainties are most important.
- Building up the domestic chip industry: It will take decades to harness our indigenous resources of the metals and minerals critical for clean energy and build up a domestic chip industry. In the interim, diplomats should secure diversified sources of supply to reduce the country’s vulnerability.
- Developing and commercializing 3G clean energy technologies: Finally, the creation of an enabling ecosystem for developing and commercializing third-generation clean energy technologies like hydrogen, biofuels and modular nuclear reactors. Nuclear, in particular, should be pushed.
Conclusion
- India is not responsible for global warming, but it will be amongst the worst affected. Millions live around its coastline. Their livelihoods will be undermined by rising sea levels. Millions will also be affected by melting glaciers and extremes of temperatures. So irrespective of who is to blame, India has to stay on the path of decarbonization. It cannot afford to develop first and clean up later.
Mains question
Q. What is the current situation of international energy market? What are the measures that India should take in the time of global uncertainty of energy market.
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Oil and Dollar, Rising Prices and Impact on India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Rising oil prices and its effects on Economy
Context
- The two major irritants for India this year have been oil and the dollar. The two are a heady cocktail that has distorted all economic forecasts creating volatility that has never been witnessed earlier. Their impact is being felt across bond and stock markets, affecting the entire system. As a result, the RBI and the government have had to work overtime to mitigate the adverse effects on the economy.
What is the current oil prices situation?
- Unpredictable Prices: When the Ukraine war broke out, oil crossed the $120 mark (in April and again in June). It was expected that $150 was not far off. However, the range of $100-110 was restored and soon enough the price was back to the Nineties as all global commodity prices cooled off, even as the Ukraine war continued.
- Rising requirement of Europe: With the winter months approaching and Europe dependent on natural gas for heating, which now appears to be in jeopardy due to Russia turning off the taps, oil has received a boost even though the continent is looking more at coal.
- Reduction in production by OPEC: Add to this the fact that OPEC and its allies have decided to lower production by 2 million barrels a day and there is panic again. This shock is external over which neither the government nor RBI have any control.
- Growing Import Bills: High oil prices mean many things. Crude has a share of 30-33 per cent in total imports and any hike in prices increases the import bill. With exports declining due to the slowdown in global growth and imports increasing due to oil, the trade deficit and current account deficit will widen further. The trade deficit for the first half is $150 billion and can touch $300 billion this year at this strike rate.
- Possibility of Balance of Payment: This creates a problem for the current account deficit with components like software and remittances slowing down due to the recession in the west. Therefore, a balance of payments problem will surface. Ultimately it depends on how high oil will go. The RBI has assumed a $100/barrel. This looks reasonable at this point, but anything higher can create problems on the currency front.
- Increasing Inflation: Inflation per se will be an issue when prices are left to the market like ATF or LPG. But in the case of petrol and diesel, it will be a conundrum for the government. If the status quo prevails on price transmission, then oil marketing companies will have to bear the losses. If the government allows the market to correct, inflation will increase as it will also feed into intermediary costs such as freight.
- Higher input cost: User industries of oil like chemicals, plastics and fertilizers will face a problem again. Higher input costs will put pressure on profit margins and any pass through will be inflationary.
- Windfall tax may increase: The government would probably once again revisit the windfall tax on crude (as has been recently done) to examine if there is any additional revenue to be garnered. Such an environment always tends to spook markets.
- Rising bond yields: Bond yields move up every time oil prices rise while stock markets turn volatile normally in the downward direction.
How rising dollar prices affects India?
- Rupee is weakening: There is the dollar conundrum which should be seen in conjunction with the oil. The dollar has been strengthening against all currencies. As the Fed tightens rates, which will carry on through 2023, the dollar will become stronger. Other countries are already in a weak economic zone and are tightening rates with a lag. The rupee is bearing the brunt of this development. There is no escape as the RBI intervention in any form can only temporarily support the decline in the rupee. In the last month or so, since the rupee crossed the 80 mark and gone past 83.
- Negative sentiment of market: Another factor that will complicate matters is expectations. The recent news, for example, of global players deciding not to include Indian bonds in global indices might add to the negative sentiment in the market and exert pressure on the rupee.
- Imported inflation: The rupee depreciation also leads to importing inflation. All goods imported will come in at a higher rupee cost which will in turn push the RBI to act further.
- Less possibility of high export: The weak rupee may not quite help exports because the competitive advantage that normally comes along with such depreciation would be low given that other currencies are also declining.
- Trade deficit will rise: Imports are unlikely to slow down as a growing economy requires inputs and raw materials. This will mean further pressure on the trade deficit. The government will gain at the margin as customs collections increase.
- Volatile investors: The critical reaction will be that of investors. If foreign portfolio investors withdraw then there will be further pressure on the rupee while inflows would help to cushion the rupee.
- Centre may lose on revenue: State governments will be better off as their VAT collections would increase automatically. However, the Centre may not gain as the excise duty is a fixed rate.
Conclusion
- One can never tell as almost all forecasters have been proved wrong this year. The theory that RBI can intervene and protect certain levels of currency has its limitations. These travails have to be responded to as they cannot be controlled.
Mains Question
Q. How rising dollar and oil prices affects the macroeconomic stability in India? What are the steps taken by RBI and GOI to manage the macroeconomic stability?
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Tax on windfall profit on crude oil, export of diesel, ATF raised
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Windfall taxes
Mains level: Read the attached story
The government raised the windfall tax on domestically-produced crude oil by more than a third while doubling the rate on export of diesel and reintroducing the levy on export of jet fuel (ATF) in line with the rise in international oil prices.
What is a Windfall Tax?
- Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event — for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
- These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
- The US Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
- One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.
When did India introduce this?
- In July this year, India announced a windfall tax on domestic crude oil producers who it believed were reaping the benefits of the high oil prices.
- It also imposed an additional excise levy on diesel, petrol and air turbine fuel (ATF) exports.
- Also, India’s case was different from other countries, as it was still importing discounted Russian oil.
How is it levied?
- Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.
- The Central government has introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production, which was subsequently revised fortnightly four times so far.
- The latest revision was on August 31, when it was hiked to ₹13,300 per tonne from ₹13,000.
Why govt. introduced windfall tax?
- There have been varying rationales for governments worldwide to introduce windfall taxes like:
- Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
- Funding social welfare schemes, and
- Supplementary revenue stream for the government
Why are countries levying windfall taxes now?
- Prices of oil, gas, and coal have seen sharp increases since last year and in the first two quarters of the current year, although they have reduced recently.
- Pandemic recovery and supply issues resulting from the Russia-Ukraine conflict shored up energy demands, which in turn have driven up global prices.
- The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for households in major and smaller economies.
- Since the gains stemmed partly from external change, multiple analysts have called them windfall profits.
Issues with imposing such taxes
- Companies are confident in investing in a sector if there is certainty and stability in a tax regime.
- Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
- IMF says that taxes in response to price surges may suffer from design problems—given their expedient and political nature.
- It added that introducing a temporary windfall profit tax reduces future investment because prospective investors will internalise the likelihood of potential taxes when making investment decisions.
- There is another argument about what exactly constitutes true windfall profits; how can it be determined and what level of profit is normal or excessive.
- Another issue is who should be taxed — only the big companies responsible for the bulk of high-priced sales or smaller companies as well— raising the question of whether producers with revenues or profits below a certain threshold should be exempt.
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NOPEC: the US bill to pressure the OPEC+ oil group
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NOPEC
Mains level: Global oil prices manipulation by OPEC
US legislation NOPEC which could open members of oil producing group OPEC+ to antitrust lawsuits has emerged as a possible tool to tackle high fuel prices.
What is NOPEC?
- NOPEC stands for No Oil Producing and Exporting Cartels (NOPEC).
- It is a bill to protect US consumers and businesses from engineered oil spikes.
- But some analysts warn that implementing it could also have some dangerous unintended consequences.
Why such a move by the US?
- OPEC+, which groups the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, agreed to steep production cuts, curbing supply in an already tight market.
- After the decision, the US decided to reduce the group’s control over energy prices.
Key feature of the NOPEC bill
- The bipartisan NOPEC bill would tweak US antitrust law to revoke the sovereign immunity that has protected OPEC+ members and their national oil companies from lawsuits.
- If signed into law, the US attorney general would gain the option to sue the oil cartel or its members, such as Saudi Arabia, in federal court.
- It is unclear exactly how a federal court could enforce judicial antitrust decisions against a foreign nation.
Is such bill effective?
- Previous versions of the NOPEC bill have failed amid resistance by oil industry groups, including the top US oil lobby groups.
- Saudi Arabia has rebuffed repeated lobbying during visits by Biden officials not to cut production.
- Instead, OPEC+ has agreed to cut output by the most since the start of the COVID-19 pandemic.
Implications of NOPEC
- NOPEC more or less is a knee-jerk reaction from the US against oil hegemony of the OPEC+.
- If passed into law, it could lead to unintended blowback.
- In 2019, for example, Saudi Arabia threatened to sell its oil in currencies other than the dollar if Washington passed a version of the NOPEC bill.
- There is a possibility that other countries could take similar action on the US for withholding agricultural output to support domestic farming, for example.
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What is OPEC+?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Opec+
Mains level: Global fuel dynamics
Oil prices rose about 1%, as OPEC+ members agreed to its deepest cuts to output since the 2020 COVID pandemic, despite a tight market and opposition to cuts from the United States and others.
What is OPEC+?
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Why is OPEC+ slashing production?
- Oil prices skyrocketed after Russia’s invasion of Ukraine.
- The cut made recently is the biggest of its kind since 2020 when OPEC+ members slashed outputs by 10 million bpd during the Covid-19 pandemic.
- The reductions would boost prices and be extremely beneficial for the Middle Eastern member states, to whom Europe has turned for oil after levelling sanctions against Russia since it invaded Ukraine.
- OPEC+ members are concerned that a faltering global economy would reduce the demand for oil, and the cuts are seen as a way to protect profits.
Concerns for India
- Even after importing cheap Russian oil, India has not seen any cut in fuel prices.
- Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs, threatening the demand-driven recovery.
- India imports about 84% of its oil and relies on West Asian supplies to meet over three-fifths of its demand.
- As one of the largest crude-consuming countries, India is concerned that such actions by producing countries have the potential to undermine consumption-led recovery.
- This would hurt consumers, especially in our price-sensitive market.
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Behind the ‘world’s first CNG terminal’ at Bhavnagar, Gujarat
Note4Students
From UPSC perspective, the following things are important :
Prelims level: CNG vs LPG
Mains level: Not Much
Prime Minister has laid the foundation stone for the “world’s first CNG (Compressed Natural Gas) terminal” at Bhavnagar in Gujarat.
Bhavnagar CNG terminal
- The idea got incepted during the January 2019 Vibrant Gujarat summit when a consortium of some stakeholder signed MoU with Gujarat Maritime Board (GMB) for development of the CNG terminal.
- The port will be built under the BOOT (Build, Own, Operate and Transfer) policy of the state government.
- The state-run GMB will continue to operate the berths on the south side of the port.
Why is the Bhavnagar port important?
- The Bhavnagar port is in close vicinity to the Dholera Special Investment Region (SIR) and is expected to serve the industries that set up base in the region.
- It is already connected to the northern hinterland through a railway line that extends to the existing berths at the port.
When is the CNG terminal expected to commence operations?
- The construction is expected to commence in the first quarter of 2023 after GMB approves the Detailed Project Report.
- It is expected to be made operational by 2026.
- The proposed port terminal’s capacity is 4.65 Million Tonnes Per Annum (MTPA), of which the capacity of the CNG terminal will be 0.3 MTPA.
What makes the port unique?
- The project will repair and redevelop the tidal lock gate system, which will be the fourth largest such system in the world.
- Traditionally, because of the higher tidal range of approximately 10 meters, Bhavnagar creek attracts a significant amount of sediment in the form of silt.
- This lock gate system has been set up so that a minimal amount of sediment enters the port basin during high tide, thus bringing down the cost of dredging inside the port substantially.
Back2Basics: Natural gas vs. LPG
- LPG, or liquefied petroleum gas, is a mixture of light hydrocarbons.
- It consists of at least 90% of propane, with the balance made up of other gases including butane.
- Natural gas, in contrast, is almost entirely made up of methane.
- Compressed Natural Gas, or CNG, and Liquefied Natural Gas, or LNG, are the same substance.
- CNG is received and stored in a vehicle’s tank in gaseous form.
- To obtain LNG, natural gas is compressed and cooled to extremely low temperatures, at which point it turns to liquid.
- LNG can then be shipped, stored, and used to fill the tanks of LNG vehicles.
- Much of the global natural gas trade occurs in the form of LNG.
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What is a Windfall Tax?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Windfall taxes
Mains level: Read the attached story
Finance Minister has defended the windfall tax imposed by the Centre on domestic crude oil producers, saying that it was not an ad hoc move but was done after full consultation with the industry.
What is a Windfall Tax?
- Windfall taxes are designed to tax the profits a company derives from an external, sometimes unprecedented event — for instance, the energy price-rise as a result of the Russia-Ukraine conflict.
- These are profits that cannot be attributed to something the firm actively did, like an investment strategy or an expansion of business.
- The US Congressional Research Service (CRS) defines a windfall as an “unearned, unanticipated gain in income through no additional effort or expense”.
- One area where such taxes have routinely been discussed is oil markets, where price fluctuation leads to volatile or erratic profits for the industry.
When did India introduce this?
- In July this year, India announced a windfall tax on domestic crude oil producers who it believed were reaping the benefits of the high oil prices.
- It also imposed an additional excise levy on diesel, petrol and air turbine fuel (ATF) exports.
- Also, India’s case was different from other countries, as it was still importing discounted Russian oil.
How is it levied?
- Governments typically levy this as a one-off tax retrospectively over and above the normal rates of tax.
- The Central government has introduced a windfall profit tax of ₹23,250 per tonne on domestic crude oil production, which was subsequently revised fortnightly four times so far.
- The latest revision was on August 31, when it was hiked to ₹13,300 per tonne from ₹13,000.
Why govt. introduced windfall tax?
- There have been varying rationales for governments worldwide to introduce windfall taxes like:
- Redistribution of unexpected gains when high prices benefit producers at the expense of consumers,
- Funding social welfare schemes, and
- Supplementary revenue stream for the government
Why are countries levying windfall taxes now?
- Prices of oil, gas, and coal have seen sharp increases since last year and in the first two quarters of the current year, although they have reduced recently.
- Pandemic recovery and supply issues resulting from the Russia-Ukraine conflict shored up energy demands, which in turn have driven up global prices.
- The rising prices meant huge and record profits for energy companies while resulting in hefty gas and electricity bills for households in major and smaller economies.
- Since the gains stemmed partly from external change, multiple analysts have called them windfall profits.
Issues with imposing such taxes
- Companies are confident in investing in a sector if there is certainty and stability in a tax regime.
- Since windfall taxes are imposed retrospectively and are often influenced by unexpected events, they can brew uncertainty in the market about future taxes.
- IMF says that taxes in response to price surges may suffer from design problems—given their expedient and political nature.
- It added that introducing a temporary windfall profit tax reduces future investment because prospective investors will internalise the likelihood of potential taxes when making investment decisions.
- There is another argument about what exactly constitutes true windfall profits; how can it be determined and what level of profit is normal or excessive.
- Another issue is who should be taxed — only the big companies responsible for the bulk of high-priced sales or smaller companies as well— raising the question of whether producers with revenues or profits below a certain threshold should be exempt.
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Ethanol Blending
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Ethanol blended petrol (EBP) Program
Mains level: E-vehicles, Green technologies
Prime Minister has announced that India has achieved its target of blending 10% sugarcane-extracted ethanol in petrol, ahead of schedule.
What is ethanol blending?
- Blending ethanol with petrol to burn less fossil fuel while running vehicles is called ethanol blending.
- Ethanol is an agricultural by-product which is mainly obtained from the processing of sugar from sugarcane, but also from other sources such as rice husk or maize.
- Currently, 10% of the petrol that powers your vehicle is ethanol.
- Though we have had an E10 — or 10% ethanol as policy for a while, it is only this year that we have achieved that proportion.
- India’s aim is to increase this ratio to 20% originally by 2030 but in 2021, when NITI Aayog put out the ethanol roadmap, that deadline was advanced to 2025.
Why need ethanol blending?
- Ethanol blending will help bring down our share of oil imports (almost 85%) on which we spend a considerable amount of our precious foreign exchange.
- Secondly, more ethanol output would help increase farmers’ incomes.
- India’s net import of petroleum was 185 million tonnes at a cost of $55 billion in 2020-21.
- A successful ethanol blending programme can save the country $4 billion per annum.
What are first-generation and second-generation ethanols?
- With an aim to augment ethanol supplies, the government has allowed procurement of ethanol produced from other sources besides molasses — which is first-generation ethanol or 1G.
- Other than molasses, ethanol can be extracted from materials such as rice straw, wheat straw, corn cobs, corn stover, bagasse, bamboo and woody biomass, which are second-generation ethanol sources or 2G.
- While inaugurating the Indian Oil Corporation’s (IOC) 2G ethanol plant last week, PM referred to not only the prospect of higher farmer income but also dwelt upon the advantages of farmers selling the residual stubble — left behind after rice is harvested — to help make biofuels.
- This means lesser stubble burning and therefore, lesser air pollution.
How have other countries fared?
- Though the U.S., China, Canada and Brazil all have ethanol blending programmes, as a developing country, Brazil stands out.
- It had legislated that the ethanol content in petrol should be in the 18-27.5% range, and it finally touched the 27% target in 2021.
How does it impact the auto industry?
- At the time of the NITI Aayog report in June last year, the industry had committed to the government to make all vehicles E20 material compliant by 2023.
- This meant that the petrol points, plastics, rubber, steel and other components in vehicles would need to be compliant to hold/store fuel that is 20% ethanol.
- Without such a change, rusting is an obvious impediment.
Are there other alternatives?
- Auto industry prefer the use of biofuels as the next step, compared to other options such as electric vehicles (EV), hydrogen power and compressed natural gas.
- This is mainly because biofuels demand the least incremental investment for manufacturers.
- Even though the industry is recovering from the economic losses bought on by the pandemic, it is bound to make some change to comply with India’s promise for net-zero emissions by 2070.
What are the challenges before the industry when it comes to 20% ethanol blended fuel?
- Key challenge is the optimisation of engines for higher ethanol blends and the conduct of durability studies on engines and field trials before introducing E20 compliant vehicles.
- Storage is going to be the main concern, for if E10 supply has to continue in tandem with E20 supply, storage would have to be separate which then raises costs.
Sources for ethanol in India
The plan was to divert its excess sugar production to produce ethanol, 3.5 million tonnes in 2021-22 and 6 million tonnes the next year, in addition to grains like rice, corn, and barley.
- Using surplus rice: The government’s food department revealed its plans to divert 17 million tonnes of surplus rice from its food stocks of 90 million tonnes to produce ethanol.
- Sugarcane: This is in addition to the 2 million tonnes of sugar which is already being diverted to produce ethanol.
How would this benefit the country?
- Cost saving: A successful biofuels programme can save India $4 billion or about ₹30,000 crore every year by lowering import of petroleum products.
- Emission cut: Ethanol is also less polluting and offers equivalent efficiency at a lower cost than petrol.
- Biofuel’s policy boost: Rising production of grains and sugarcane and feasibility of making vehicles compliant to ethanol-blended fuel makes its biofuels policy a strategic requirement.
- Early rollout: Towards this, govt has put in place interest subsidies for distilleries to expand capacity while auto firms have agreed to make compatible vehicles.
What are the unintended effects of the policy?
- Unsustainability of cash-crops: Increasing reliance on biofuels can push farmers to grow more water-intensive crops like sugarcane and rice.
- Huge water requirement: Currently use 70% of the available irrigation water, negating some positive impact on the environment of using more ethanol.
- Food and nutrition security: The move could impact India’s hunger situation by limiting the coverage of the food security schemes.
- Food inflation: Diversion of mass consumption grains can also push food prices up.
How will it impact crop diversification?
- Monotonous crops: Although the biofuels policy stresses on using less water-consuming crops, farmers prefer to grow more sugarcane and rice due to price support schemes.
- Water stress: Growing more of them can lead to an adverse impact in water-stressed areas in states.
What about food security?
- It is unethical to use edible grains to produce ethanol in a country where hunger is rampant.
- India is already a poor performer in Global Hunger Index.
- Although about 80 crore people are now receiving subsidized food grains, calculations show that over 10 crore eligible households are still excluded.
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After Ukraine, the new energy disorder
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Energy security and challenge
Context
Our long-standing “friend“ (Russia) is now in the bad books of our other friends (the US and Europe) and in a deepening relationship with our adversary (China). The Gulf countries are crucial for our energy security but Russia has replaced them as our principal supplier
How Ukraine war is changing the energy policies
- Six months back before the start of the Ukrainian conflict, there was a deepening sense that fossil fuels and the industry built around them were in terminal decline.
- After the Ukraine war began, the petroleum market is tight and prices are ratcheting up.
- Oil prices are close to $120/bbl and gas prices have jumped 500 per cent year on year in Europe.
- The regulatory constraints on petroleum exploration and distribution infrastructure have been eased and several countries have removed the output limits on thermal power generation and reopened the coal mines that were closed.
- The share prices of the oil majors are trading at multi-year highs.
Three issues that influences India’s energy policy
1] Long term implications of buying oil from Russia
- India is now a major purchaser of Russian crude.
- Last month, it reportedly purchased an average of 1.2 mbd.
- If this figure is correct, Russia is now our largest provider of crude oil surpassing Saudi Arabia and Iraq.
- The reason for this ramp-up is the price discount offered by Russia.
- The decision is driven by good economics and energy security.
- The Western world does not, however, see it this way.
- The question does arise: What might be the medium to longer-term implications of our “support” to Russia on relations with Capitol Hill, the UK and the European Commission?
2] Increased economic and energy ties of Russia and China
- Russia and China have, for long, shared the view that the US is their biggest security threat.
- China also increased the purchase of Russian oil and gas.
- This tightened economic and energy embrace has implications for India.
- Several questions will need to be addressed.
- Russia’s role in India-China conflict: How might a post-Ukraine weakened Russia that is in hock to China respond to India in the event matters deteriorate on our border with China?
- Will they be reliable providers of crude oil, military equipment, minerals, and metals essential for our green transition?
- Will they be politically autonomous or client states?
3] Important role of the Gulf states
- The Ukrainian crisis has forced a presidential u-turn. Later this month, President Biden will visit Saudi Arabia.
- Several other European leaders will also beat a path to the Gulf, all in the hope of extracting a promise of higher production to lower oil prices and some to negotiate gas supply deals.
- India needs the Gulf producers for supply security. But it also wants oil prices to come down.
- The position of these producers in the reordered post-Ukraine energy landscape is, therefore, of relevance.
- Will they respond positively to the courtship of Russia/China, move back into the Western fold, or stay outside both orbits, neutral and opportunistic?
- The answer will bear on India’s energy security.
Way forward
- Integrated energy policy: What we need is a mechanism for the development and execution of an integrated energy policy.
- This is because currently there is no executive authority responsible for energy.
- There are ministries responsible for components of energy policy but no formal mechanism for aligning their separate approaches.
- The Ukraine war has disrupted the existing energy order.
- The new energy (dis) order has created fissures that impact our national security, economic growth, trade, clean energy supply lines, transfer of technology and international relations.
- We cannot, therefore, afford to continue with our existing siloed approach.
Conclusion
The Ukrainian crisis has radically altered the contours of the global energy landscape and created a tangle of relationships and issues for India. To smoothen this tangle and address the issues India should adopt “a whole of the system” approach to energy policy.
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Green Hydrogen: Fuel of the Future
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Green Hydrogen
Mains level: National Hydrogen Mission
India aspires to emerge as the leader of green hydrogen by taking advantage of the current energy crisis across the globe.
Why in news?
- Oil India Limited (OIL) has commissioned India’s first 99.99% pure green hydrogen plant in eastern Assam’s Jorhat.
- Powered by a 500 KW solar plant, the green hydrogen unit has an installed capacity to produce 10 kg of hydrogen per day and scale it up to 30 kg per day.
What is Hydrogen?
- Hydrogen is the lightest, simplest and most abundant member of the family of chemical elements in the universe.
- It is colourless, odourless, tasteless, non-toxic and highly combustible gaseous substance.
What is Green hydrogen?
- Green hydrogen is the one produced with no harmful greenhouse gas emissions.
- It is made by using clean electricity from surplus renewable energy sources, such as solar or wind power, to electrolyse water.
- Electrolysers use an electrochemical reaction to split water into its components of hydrogen and oxygen, emitting zero-carbon dioxide in the process.
- Green hydrogen currently makes up a small percentage of the overall hydrogen, because production is expensive.
Why is India pursuing green hydrogen?
- Under the Paris Agreement of 2015, India is committed to reducing its greenhouse gas emissions by 33-35% from the 2005 levels.
- It is a legally binding international treaty on climate change with the goal of limiting global warming to below 2°C compared to pre-industrial levels.
- At the 2021 CoP in Glasgow, India reiterated its commitment to move from a fossil and import-dependent economy to a net-zero economy by 2070.
- India’s average annual energy import bill is more than $100 billion .
- The increased consumption of fossil fuel has made the country a high CO2 emitter which accounts for nearly 7% of the global CO2 burden.
Various policy moves
- In order to become energy independent by 2047, the government stressed the need to introduce green hydrogen as an alternative fuel that can make India the global hub and a major exporter of hydrogen.
- The National Hydrogen Mission was launched on August 15, 2021, with a view to cutting down carbon emissions and increasing the use of renewable sources of energy.
How much green hydrogen is India producing?
- India has just begun to generate green hydrogen with the objective of raising non-fossil energy capacity to 500 gigawatts by 2030.
- It was on April 20, 2022 that the public sector OIL, which is headquartered in eastern Assam’s Duliajan, set up India’s first 99.99% pure green hydrogen pilot plant.
- Research and development efforts are ongoing for a reduction in the cost of production, storage and the transportation of hydrogen.
What are the advantages of hydrogen as a fuel?
- Hydrogen can be used to produce electricity using fuel cells.
- Hydrogen, thus, can act as an energy storage device and contribute to grid stability.
- The oxygen, produced as a by-product (8 kg of oxygen is produced per 1 kg of hydrogen), can also be monetised by using it for industrial and medical applications or for enriching the environment.
Limitations to Hydrogen
- Despite being the most abundant element in the Universe, hydrogen does not exist on its own so needs to be extracted from water via electrolysis or separated from carbon fossil fuels.
- Hydrogen fuel cells need huge investment to be developed to the point where they become a genuinely viable energy source.
- This will also require the political will to invest the time and money into development in order to improve and mature the technology.
- Precious metals such as platinum and iridium are typically required as catalysts in fuel cells meaning unfeasibly high cost.
- There are also barriers around regulatory issues concerning the framework that defines commercial deployment models.
- Storage and transportation of hydrogen is more complex than that required for fossil fuels due to its high inflammability.
Back2Basics: Colours spectrum of Hydrogen
(1) Green hydrogen
(2) Blue hydrogen
- It is produced mainly from natural gas, using a process called steam reforming, which brings together natural gas and heated water in the form of steam.
- The output is hydrogen – but also carbon dioxide as a by-product.
- That means carbon capture and storage (CCS) is essential to trap and store this carbon.
- Blue hydrogen is sometimes described as ‘low-carbon hydrogen’ as the steam reforming process doesn’t actually avoid the creation of greenhouse gases.
(3) Grey hydrogen
- Currently, this is the most common form of hydrogen production.
- Grey hydrogen is created from natural gas, or methane, using steam methane reformation but without capturing the greenhouse gases made in the process.
(4) Black and brown hydrogen
- Any hydrogen made from fossil fuels through the process of ‘gasification’ is sometimes called black or brown hydrogen interchangeably.
- They are the most environmentally damaging.
(5) Pink hydrogen
- Pink hydrogen is generated through electrolysis powered by nuclear energy.
- Nuclear-produced hydrogen can also be referred to as purple hydrogen or red hydrogen.
- In addition, the very high temperatures from nuclear reactors could be used in other hydrogen productions by producing steam for more efficient electrolysis or fossil gas-based steam methane reforming.
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Ethanol blend in petrol to be raised to 20% in 3 years
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Ethanol blended petrol (EBP) Program
Mains level: India's quest for clean mobility
The Union Cabinet has approved amendments to the National Policy on Biofuels, 2018, to advance the date by which fuel companies have to increase the percentage of ethanol in petrol to 20%, from 2030 to 2025.
What is the news?
- The policy to introduce 20% ethanol in petrol will take effect from April 1, 2023.
Why such move?
- A 2021 report by the NITI Aayog said that 20% ethanol blending by 2025 could accrue immense benefits such as:
- Saving ₹30,000 crore of foreign exchange per year
- Increased energy security
- Lowered carbon emissions
- Better air quality
- Self-reliance
- Better use of damaged foodgrains
- Increase farmers’ incomes and investment opportunities
What is the present status of ethanol blending in India?
- India achieved 9.45% ethanol blending as on March 13, 2022, according to the Ministry of Petroleum and Natural Gas.
- The Centre projects that this will reach 10% by the end of financial year 2022.
- The government first announced its plans of advancing the 20% blending target in December 2020.
Why is it so difficult to raise the blending?
- A 10% blending of petrol does not require major changes to engines.
- But a 20% blend could require some changes and may even drive up the prices of vehicles.
- A greater percentage of blending could also mean more land being diverted for water-intensive crops such as sugar cane, which the government currently subsidises.
Back2Basics: Ethanol Blended Petrol (EBP) Programme
- EBP programme was launched in January, 2003 for supply of 5% ethanol blended petrol.
- The programme sought to promote the use of alternative and environment-friendly fuels and to reduce import dependency for energy requirements.
- OMCs are advised to continue according to priority of ethanol from 1) sugarcane juice/sugar/sugar syrup, 2) B-heavy molasses 3) C-heavy molasses and 4) damaged food grains/other sources.
- At present, this programme has been extended to the whole of India except UTs of Andaman Nicobar and Lakshadweep islands with effect from 01st April 2019 wherein OMCs sell petrol blended with ethanol up to 10%.
Also read:
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Ujjwala LPG Scheme: 90-lakh beneficiaries don’t take refills
Note4Students
From UPSC perspective, the following things are important :
Prelims level: PM UJJWALA Scheme
Mains level: Not Much
In the financial year 2021-22, 90-lakh beneficiaries of the flagship welfare scheme, Pradhan Mantri Ujjwala Yojana (PMUY), did not take refill gas cylinders. And over one crore beneficiaries got their refills only once.
About the PM Ujjwala Yojana
- Pradhan Mantri Ujjwala Yojana (PMUY) was launched in 2016, with the aim to provide Liquefied petroleum gas (LPG) connections to five crore women members of below poverty line (BPL) households in the first phase.
- he scheme was expanded in April 2018 to include women beneficiaries from seven more categories (SC/ST, PMAY, AAY, Most backward classes, tea garden, forest dwellers, Islands).
- In the second phase the target was expanded to eight crore LPG connections.
Why was this scheme launched?
- Indoor air pollution is also responsible for a significant number of acute respiratory illnesses in young children.
- Providing LPG connections to BPL households will ensure universal coverage of cooking gas in the country.
- This measure has empowered women and protected their health. It reduced drudgery and the time spent on cooking.
- It will also provide employment for rural youth in the supply chain of cooking gas.
Ujjwala 2.0
- Now migrant workers would only be required to submit a self-declaration of their residential address to get the gas connection.
- Along with a deposit-free LPG connection, Ujjwala 2.0 will provide the first refill and a hotplate free of cost to the beneficiaries.
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State Taxes on Fuels
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Taxes on fuels
Mains level: Fuel price hikes and related inflation
PM has said that fuel prices were too high in some States ruled by other parties and they were not passing on the benefits of the Centre’s excise duty cut to the people.
Why are states reluctant?
- The reluctance to reduce excise duty and VAT on fuel stems from the fact that it constitutes an important source of revenue for both the Union government and the states.
- Excise duty on fuel makes up about 18.4 per cent of Centre’s gross tax revenues.
- Petroleum and alcohol, on an average, account for 25-35 per cent of the own tax revenue of states
Present taxation of Fuels
What is Excise Duty?
- Excise duty is a form of tax imposed on goods for their production, licensing and sale.
- It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
- At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
- Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.
Purview of excise duty
- The GST introduction in July 2017 subsumed many types of excise duty.
- Today, excise duty applies only on petroleum and liquor.
- Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
- States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
- After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government.
- The revenue generated from CGST goes to the central government.
Types of excise duty in India
Before GST, there were three kinds of excise duties in India.
(1) Basic Excise Duty
- Basic excise duty is also known as the Central Value Added Tax (CENVAT).
- This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
- This duty applied on all goods except salt.
(2) Additional Excise Duty
- Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
- This duty was levied on some special category of goods.
(3) Special Excise Duty
- This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
- Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.
Present taxation of Fuels
- Currently, taxes on petroleum products are levied by both the Centre and the states.
- While the Centre levies excise duty, states levy value-added tax (VAT).
- For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crores annually.
- By being able to levy VAT on these products, the state governments have control over their revenues.
- When a national GST subsumed central taxes such as excise duty and state levies like VAT on July 1, 2017, five petroleum goods – petrol, diesel, ATF, natural gas and crude oil – were kept out of its purview.
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India’s Crude Oil Imports from OPEC
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC, OPEC Plus
Mains level: India's crude oil import
OPEC’s share of India’s oil imports for the FY22 financial year remained almost steady year-on-year, arresting sharp declines over the past six years, as refiners prefer crude from West Asia to counter rising global prices.
India’s crude oil imports from OPEC
- OPEC oil accounted for about 88% of India’s crude imports in FY08.
- Its share of India’s overall imports could decline because refiners in Asia’s third-largest economy are buying cheaper Russian oil.
- However, Russian oil continued to account for less than 1% of India’s crude imports in FY22.
What is OPEC?
- OPEC stands for Organization of the Petroleum Exporting Countries.
- It is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
- It is headquartered in Vienna, Austria.
- OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
- Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.
What is OPEC+?
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Why OPEC plus came into existence?
- When Russia concluded the Vienna Agreement in 2016, the Russian leadership believed that it would help prepare the country for the Russian presidential elections in March 2018.
- Higher oil prices ensured the Kremlin’s financial capacity to lead a successful electoral campaign.
- This changed the regime’s priorities – from satisfying the needs of the general population to ensuring the sustainability of the Kremlin’s alliance with powerful tycoons, including that controlling oil production.
- For Saudi Arabia, turning what had been an ad hoc coalition into a formal group provides a hedge (protection) against future oil-market turbulence.
- For Russia, the formalization of the group helps expand Putin’s influence in the Middle East
- However, both reportedly aimed at causing a drop in oil prices in order to hit US shale producers, who have continued to benefit from OPEC production cuts by expanding their market share.
Try this PYQ:
Q.The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of
(a) Crude oil
(b) Bullion
(c) Rare earth elements
(d) Uranium
Post your answers here.
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Places in news: Gulf of Gabes
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gulf of Gabes
Mains level: Not Much
A Fuel Ship with 750 tons of diesel sinks off the Gulf Of Gabes in Tunisia.
Gulf of Gabes
- The Gulf of Gabes also known as Lesser Syrtis contrasting with the Greater Syrtis in Libya, is a gulf on Tunisia’s east coast in the Mediterranean Sea, off North Africa.
- The gulf roughly spans the coast from Sfax to Djerba.
- At the head of the gulf is the city of Gabès (Ghannouche) where the tides have a large range of up to 2.1 m at spring tides.
- Both Gabès and Sfax are major ports on the gulf, supporting sponge and tuna fisheries, with Gabès being the economic and administrative centre.
- It is 60 miles (100 km) long and 60 miles wide and is bounded by the Qarqannah (Kerkena) Islands on the northeast and by Jarbah (Djerba) Island on the southeast.
Regional economy of the gulf
- Except for the Strait of Gibraltar and the Gulf of Venice, it is the only part of the Mediterranean with a substantial tidal range, causing the uncovering of extensive sandbanks at low water.
- Sponge and tuna fisheries are located at the main ports of Qābis (Gabès) and Ṣafāqis (Sfax).
- Oil and natural-gas deposits have been found in the gulf, east of Ṣafāqis.
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What are Oil Bonds?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Oil Bonds
Mains level: Burden of oil bonds on exchequer
Over the last one year, as retail prices of petrol, diesel and other petroleum products have surged, the government has attracted criticism.
Finance Minister has sought to counter such criticism by claiming that the current government cannot bring down taxes (and, as a consequence, prices) because it has to pay for the oil bonds issued by the previous regime.
What are oil bonds?
- An oil bond is an IOU (I owe you), or a promissory note issued by the government to the OMCs, in lieu of cash that the government would have given them so that these companies don’t charge the public the full price of fuel.
- An oil bond says the government will pay the oil marketing company the sum of, say, Rs 1,000 crore in 10 years.
- And to compensate the OMC for not having this money straightaway, the government will pay it, say, 8% (or Rs 80 crore) each year until the bond matures.
- Thus, by issuing such oil bonds, the government of the day is able to protect/ subsidise the consumers without either ruining the profitability of the OMC or running a huge budget deficit itself.
Why were they issued?
- When fuel prices were too high for domestic consumers, governments in the past often asked oil marketing companies (OMCs) to avoid charging consumers the full price.
- But if oil companies don’t get paid, they would become unprofitable.
- To address this, the government said it would pay the difference.
- But again, if the government paid that amount in cash, it would have been pointless, because then the government would have had to tax the same people to collect the money to pay the OMCs.
- This is where oil bonds come in.
How much of fuel prices is tax?
- There are two components to the domestic retail price — the price of crude oil itself, and the taxes levied on this basic price.
- Together they make up the retail price.
- The taxes vary from one product to another. For instance, as of now, taxes account for 50% of the total retail price for a litre of petrol, and 44% for a litre of diesel.
How much of the UPA-era oil bonds has the NDA government paid back?
- There are two components of oil bonds that need to be paid off: the annual interest payment, and the final payment at the end of the bond’s tenure.
- By issuing such bonds, a government can defer the full payment by 5 or 10 or 20 years, and in the interim just pay the interest costs.
- Table 1 shows that between 2015 and 2021, the NDA government has fully paid off four sets of oil bonds — a total of Rs 13,500 crore.
- Each year, the BJP government had also had to pay the interest rate on all bonds that have not matured. Chart 1 shows the amount paid towards interest payment each year.
- Between 2014 and 2022, the government has had to spend a total of Rs 93,686 crore towards interest as well as the principal.
Still, isn’t it a bad idea to issue such bonds?
- Former PM Manmohan Singh was correct in noting that issuing bonds just pushed the liability to a future generation.
- But to a great extent, most of the government’s borrowing is in the form of bonds.
- This is why each year the fiscal deficit (which is essentially the level of government’s borrowing from the market) is so keenly tracked.
- Further, in a relatively country like India, all governments are forced to resort to the use of bonds of some kind.
- Take the current NDA government itself, which has issued bonds worth Rs 2.79 lakh crore (twice the amount of oil bonds) to recapitalise public sector banks.
- These bonds will be paid by governments till 2036.
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Russia’s offer of cheaper oil is tempting, but India must be cautious
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Export to GDP ratio of India
Mains level: Paper 3- Issues in buying cheaper oil from Russia
Context
With oil above $100, the government now has to spend twice as much to import oil as it did earlier. Russia has offered to sell oil at lower prices to India. It is a hard temptation for India to resist. But one that comes with profound and long-lasting consequences.
Issues in buying oil from Russia
1] Impact on India’s export due to threat of the secondary sanction by the US
- The demise of the Soviet Union made it easier for India to abandon the Soviet-influenced ideology of a planned economy and veer towards the American version of a market economy.
- Now, in the reverse ideological direction, Russia’s offer of cheaper oil has hidden and direct costs that India will have to deliberate upon.
- Whenever global crude oil prices have risen above $100 in the past, India was able to cushion that shock primarily through growth in exports.
- When oil prices were similarly high, exports rose to nearly 25 per cent of nominal GDP, which helped India withstand the shock.
- However, exports now have fallen dramatically to 18 per cent of GDP, which must be revived.
- The US is India’s biggest export market.
- The US has already cautioned India about abetting Russia by buying Russian oil.
- It remains to be seen if the US will impose secondary sanctions against India for buying discounted Russian oil, but that threat looms large.
2] Cascading de-dollarisation
- With US sanctions against Russia, it will insist on payment in rubles.
- If India is forced to accept trading in rubles with Russia, then it is very likely that China, which is India’s second-largest trading partner, may also insist on payments in Chinese yuan.
- Saudi Arabia may also insist on trading in a currency other than the US dollar.
- This cascading “de-dollarisation” phenomenon will further irk and antagonise the US, since it weakens the dollar’s status as the world’s reserve currency.
- If India is forced to purchase Russian oil in rubles and potentially trade in yuan with China and others, it can catapult India into the centre of a geo-economic war that it can ill afford.
Opportunity for India
- The Russia-Ukraine conflict can be an opportunity for India to step up and capture global market share in goods and services.
- There is already talk of India capitalising on wheat exports, albeit a tiny share of India’s overall exports, as a fallout of global sanctions against Russian wheat.
Conclusion
Exports remain India’s biggest hope for a long-term sustainable economic recovery with ample job creation. India cannot risk being isolated in future global trade for near-term discounted oil deals with Russia.
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How to handle impact of Ukrainian crisis on India’s energy sector
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Opec plus
Mains level: Paper 3- Impact of Ukraine crisis on India's energy sector
Context
The Ukraine crisis will affect India’s energy landscape in many ways. This article analyses the impact and suggest the policy measures.
The trajectory of oil prices
- The inflation-adjusted price of Brent crude is $83/bbl (as of writing, the nominal price is $116 / bbl), which is lower than the peak of $145/ bbl in 2008 and the average price that year of $100/bbl.
- In other words, prices could rise much further and we would still not be in uncharted waters.
- Factors affecting prices: The price trajectory will depend on the duration of the conflict, its impact on global energy demand, countervailing supply measures (for example, drawdown of strategic reserves, diversion of US LNG supplies to Europe, the Iranian nuclear deal which, if signed, could release up to 1 mbd of Iranian crude into the market) and whether in all this mayhem, the pipeline infrastructure currently feeding Russian gas into Europe remains operational.
- Impact on India’s earnings: Our earnings from petroleum products (diesel, petrol, naphtha) will be adversely impacted.
- In 2021, these products generated $39 billion in revenue and at 14 per cent, they accounted for the highest share of export earnings.
Impact on India’s energy assets in Russia
- ONGC has a 26 per cent stake in the Vankor oil field, a 20 per cent stake in the Sakhalin-1 LNG/oil export complex.
- All these holdings have eroded substantially in value.
- In India, Rosneft (the Russian national oil company) operates the 20 mtpa refinery in Vadinar through Nayara Energy.
- Nayara is not sanctioned but the traders of crude/products might worry about transacting with an Indian company owned by a sanctioned Russian entity.
Four emergent energy trends that would affect India
- 1] Energy ties of Russia and China: Only last week, for instance, Gazprom signed off on an agreement to build a second gas pipeline to China christened “Power of Siberia 2”.
- The “Power of Siberia 1” pipeline has been pumping gas into China since 2019.
- 2] Emergence of US as second largest producer: The emergence of the US as the largest producer of oil in the world and potentially the largest exporter of LNG.
- It has the capacity to blunt the impact of a supply shortfall but as it is controlled by profit-maximising private corporates.
- 3] The ability of Saudi Arabia to swing the crude oil market: It is the one member of OPEC plus with significant spares, low cost, producible capacity (approx 3 mbd) of crude oil.
- The US has pressured Saudi to bring this volume into the market but they have, as yet, not buckled.
- 4] China’s dominance over rare earth metals: The chokehold of China over the rare earths, minerals and components that are required to effect the transition to a clean energy system.
Suggestions for India
- 1] Take into account uncertainty: Frame the polic around the expectation of continuing volatility.
- 2] Strategic reserves: Build up strategic reserves to safeguard against the unexpected.
- 3] Transnational pipelines: Revive conversations with Turkmenistan and Iran about a transnational gas pipeline.
- 4] Reduce dependence on China for minerals and components required for the transition to clean energy: Fast forward efforts to decouple the supply chain dependence on China for the minerals and components required for the clean energy transition.
- And, finally bring in psychologists to get a better fix on the logic that drives the decisions of the energy autocrats in Russia, Saudi Arabia and China.
Conclusion
The Ukraine crisis throws up many learnings. But one needs particular emphasis. It is not enough to read the tea leaves of supply, demand and geopolitical trends to understand the trajectory of the energy market.
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Green Hydrogen Policy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Green Hydrogen
Mains level: Gas based economy
The Ministry of Power has notified the first part of the National Hydrogen Mission policy on green hydrogen and green ammonia, aimed to boost production of hydrogen and ammonia using renewable energy.
What is green hydrogen?
- Green hydrogen is hydrogen gas produced through electrolysis of water.
- It is an energy intensive process for splitting water into hydrogen and oxygen— using renewable power to achieve this.
Key takeaways of the Green Hydrogen Policy
- The new policy offers 25 years of free power transmission for any new renewable energy plants set up to supply power for green hydrogen production before July 2025.
- This means that a green hydrogen producer will be able to set up a solar power plant in Rajasthan to supply renewable energy to a green hydrogen plant in Assam.
- It would not be required to pay any inter-state transmission charges.
What are the incentives?
- The government is set to provide a single portal for all clearances required for setting up green hydrogen production.
- It will facilitate producers to transfer any surplus renewable energy generated with discoms for upto 30 days and use it as required.
- The requirement of time bound clearances for these projects would spur investment while grid connectivity on priority will ease operational processes.
- The energy plants set up to produce green hydrogen/ammonia would be given connectivity to the grid on a priority basis.
- State DISCOMS may also procure renewable energy to supply green hydrogen producers but will be required to do so at a concessional rate.
- Such procurement would also count towards a state’s Renewable Purchase Obligation (RPO) under which it is required to procure a certain proportion of its requirements from renewable energy sources.
Facilities to boost export
- Under the policy port authorities will also provide land at applicable charges to green hydrogen and green ammonia producers to set up bunkers near ports for storage prior to export.
- Germany and Japan could be key markets for green hydrogen produced in India.
Why such move?
- The move is likely going to make it more economical for key users of hydrogen and ammonia such as the oil refining, fertiliser and steel sectors to produce green hydrogen for their own use.
- These sectors currently use grey hydrogen or grey ammonia produced using natural gas or naphtha.
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Places in news: Darvaza Gas Crater
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Darvaza Gas Crater, TAPI gas pipeline
Mains level: Not Much
Turkmenistan President has ordered experts to find a way to extinguish a fire in a huge natural gas crater, the Darvaza gas crater also known as the ‘Gateway to Hell’.
Darvaza Gas Crater
- Located in the Karakum desert, 260 kilometres away from Turkmenistan’s capital, Ashgabat, the crater has been burning for the last 50 years.
- The crater is 69 metres wide and 30 metres deep.
- While the details of the origin of the crater are contested but it has been said that the crater was created in 1971 during a Soviet drilling operation.
- In 1971, Soviet geologists were drilling for oil in the Karakum desert when they hit a pocket of natural gas by mistake, which caused the earth to collapse and ended up forming three huge sinkholes.
Why is it flamed?
- This pocket of natural gas contained methane, hence to stop that methane from leaking into the atmosphere, the scientists lit it with fire, assuming the gas present in the pit would burn out within a few weeks.
- The scientists seemed to have misjudged the amount of gas present in the pit, because the crater has been on fire for five decades now.
A popular tourist attraction
- The crater has become a significant tourist attraction in Turkmenistan.
- In 2018, the country’s president officially renamed it as the “Shining of Karakum”.
Why did Turkmenistan order to extinguish it?
- Calling it a human-made crater, it has negative effects on both environment and the health of the people living nearby.
- It also ends up losing valuable natural resources for which could fetch significant profits.
How harmful are methane leaks?
- Methane is the primary contributor to the formation of ground-level ozone, a hazardous air pollutant and greenhouse gas, exposure to which causes 1 million premature deaths every year.
- Methane is also a powerful greenhouse gas. Over a 20-year period, it is 80 times more potent at warming than carbon dioxide.
Back2Basics: TAPI Gas Pipeline
- The Turkmenistan–Afghanistan–Pakistan–India (TAPI) Pipeline is a natural gas pipeline being developed with the participation of the Asian Development Bank.
- It will be a 1,814km trans-country natural gas pipeline running across four countries.
- It will transport natural gas from the Galkynysh Gas Field in Turkmenistan through Afghanistan into Pakistan and then to India.
- The plan for the TAPI project was originally conceived in the 1990s to generate revenue from Turkmenistan’s gas reserves by exporting natural gas via Afghanistan to Pakistan and India.
- Construction on the project started in Turkmenistan on 13 December 2015, work on the Afghan section began in February 2018, and work on the Pakistani section was planned to commence in December 2018.
- Presently, the construction work has been stalled due to terror activities of Taliban in Afghanistan since few years.
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Shale and its potential in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Shale Gas and Oil, Fracking processes
Mains level: Shale gas potential of India
Cairn Oil & Gas has announced that it is partnering US-based Halliburton to start shale exploration in the Lower Barmer Hill formation, Western Rajasthan.
What is Shale oil?
- Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution.
- These processes convert the organic matter within the rock (kerogen) into synthetic oil and gas.
- The refined products can be used for the same purposes as those derived from crude oil.
How does it differ from conventional crude oil?
- The key difference between shale oil and conventional crude is that the former, also called ‘tight oil’, is found in smaller batches, and deeper than conventional crude deposits.
- Its extraction requires creation of fractures in oil and gas rich shale to release hydrocarbons through a process called hydraulic fracking.
What is fracking?
- Fracking is the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside.
- Water, sand and chemicals are injected into the rock at high pressure which allows the gas to flow out to the head of the well.
- The process can be carried out vertically or, more commonly, by drilling horizontally to the rock layer, which can create new pathways to release gas or used to extend existing channels.
- The term fracking refers to how the rock is fractured apart by the high-pressure mixture.
Shale production in the world
- Russia and the US are among the largest shale oil producers in the world.
- With a surge in shale oil production in the US, it has played a key role in turning the country from an importer of crude to a net exporter in 2019.
Shale reserves in India
- As per the US EIA 2015 report, India has got technically recoverable shale gas of 96 trillion cubic feet.
- The recoverable reserves are identified in Cambay, Krishna – Godavari, Cauvery, Damodar Valley, Upper Assam, Pranahita – Godavari, Rajasthan and Vindhya Basins.
- The ONGC has drilled the first exploratory shale gas well in Jambusar near Vadodara, Gujarat, in Cambay basin during October 2013.
What are the prospects of shale oil exploration in India?
- Currently, there is no large-scale commercial production of shale oil and gas in India.
- Shale oil and gas exploration faces several challenges other than environmental concerns around massive water requirements for fracking and potential for ground water contamination.
- State-owned ONGC had, in 2013, started exploration and, by the end of FY21, assessed shale oil and gas potential in 25 nomination blocks.
- But it has reduced investments over the past few years after only getting limited success in shale exploration efforts.
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Centre cuts Excise Duty on Petrol and Diesel
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Excise duty
Mains level: Petroleum pricing in India
The Government has finally reduced fuel prices by slashing excise duties on petrol and diesel by ₹5 and ₹10 per litre respectively.
What is Excise Duty?
- Excise duty is a form of tax imposed on goods for their production, licensing and sale.
- It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
- At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
- Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.
Purview of excise duty
- The GST introduction in July 2017 subsumed many types of excise duty.
- Today, excise duty applies only on petroleum and liquor.
- Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
- States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
- After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government.
- The revenue generated from CGST goes to the central government.
Types of excise duty in India
Before GST, there were three kinds of excise duties in India.
(1) Basic Excise Duty
- Basic excise duty is also known as the Central Value Added Tax (CENVAT).
- This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
- This duty applied on all goods except salt.
(2) Additional Excise Duty
- Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
- This duty was levied on some special category of goods.
(3) Special Excise Duty
- This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
- Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.
Present taxation of Fuels
- Currently, taxes on petroleum products are levied by both the Centre and the states.
- While the Centre levies excise duty, states levy value-added tax (VAT).
- For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crores annually.
- By being able to levy VAT on these products, the state governments have control over their revenues.
- When a national GST subsumed central taxes such as excise duty and state levies like VAT on July 1, 2017, five petroleum goods – petrol, diesel, ATF, natural gas and crude oil – were kept out of its purview.
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[pib] Automated fuelling technology- UFill
Note4Students
From UPSC perspective, the following things are important :
Prelims level: UFill
Mains level: NA
The Bharat Petroleum Corporation Limited (BPCL) has launched an automated fuelling technology -UFill- to ensure that its customers have a better experience at outlets.
What is UFill?
- UFill functionality, which has been described as swift, secure and smart, has been launched in 65 cities and will soon be launched across the country.
- It does not need any app download, and is payment app agnostic.
- Customer can use any payment app already downloaded on his/her phone.
- It offers real time QR and voucher code through SMS and is accepted at all BPCL Fuel Stations where the functionality is enabled.
Key features
- UFill aims to improve customer’s turn-around time (TAT) at fuel outlet and increase transactional transparency, thereby providing enhanced retail like experience.
- The technology provides the customer with control of fuelling as well as touch less pre-payment solution.
- There is no need to check zero before fuelling or final reading, the dispensing unit will automatically dispense the exact quantity of fuel.
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Places in news: Gulf of Mexico
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gulf of Mexico
Mains level: NA
An oil spill spanning at least 10 miles has been captured by satellite imagery in waters off the Louisiana coast near the Gulf of Mexico.
Gulf of Mexico
- The Gulf of Mexico is an ocean basin and a marginal sea of the Atlantic Ocean, largely surrounded by the North American continent.
- It is bounded on the northeast, north and northwest by the Gulf Coast of the United States; on the southwest and south by the Mexican states of Tamaulipas, Veracruz, Tabasco, Campeche, Yucatan, and Quintana Roo; and on the southeast by Cuba.
- The US states of Texas, Louisiana, Mississippi, Alabama, and Florida, which border the Gulf on the north, are often referred to as the “Third Coast” of the United States (in addition to its Atlantic and Pacific coasts).
- It is covered with a tangle of pipes, wells and other energy infrastructure, much of it no longer used, as a result of generations of oil extraction there.
Its formation
- The Gulf of Mexico took shape approximately 300 million years ago as a result of plate tectonics.
- Its floor consists of sedimentary rocks and recent sediments.
- It is connected to the part of the Atlantic Ocean through the Florida Straits between the US and Cuba, and with the Caribbean Sea via the Yucatán Channel between Mexico and Cuba.
- Because of its narrow connection to the Atlantic Ocean, the Gulf experiences very small tidal ranges.
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Leaded Petrol is officially eradicated
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Leaded Petrol
Mains level: Not Much
The use of leaded petrol has been eradicated from the globe, a/c to the UN Environment Programme (UNEP).
What is Leaded Petrol?
- Tetraethyl-lead (TEL) is a petro-fuel additive, first being mixed with petrol beginning in the 1920s as a patented octane rating booster that allowed engine compression to be raised substantially.
- This in turn caused increased vehicle performance and fuel economy.
- The practice of adding tetraethyl lead to petrol had spread widely to all countries soon after its anti-knock and octane-boosting properties were discovered.
- TEL is still used as an additive in some grades of aviation gasoline.
Issues with leaded petrol
- Lead is toxic, affects multiple body systems and is particularly harmful to young children.
- It affects the brain, liver, kidneys, and bones. Lead is measured in the blood to understand exposure.
- Lead in bone is released into the blood during pregnancy and becomes a source of exposure to the developing foetus.
- More recent research has indicated that lead can damage the infant brain even at blood levels as low as 5 microunits per decilitre (μ/dl).
India’s tryst with leaded petrol
- India was among those countries that took early action to phase out leaded petrol. The process of phase down that had started in 1994, got completed in 2000.
- Initially, low-leaded petrol was introduced in Delhi, Mumbai, Kolkata and Chennai in 1994, followed by unleaded petrol in 1995.
- The entire country got low-leaded petrol in 1997 while leaded fuel was banned in the National Capital Territory of Delhi.
- The final introduction of unleaded petrol in the entire country was mandated in April 2000.
- This decision was also catalyzed by the Supreme Court order that had directed the introduction of unleaded petrol to enable the adoption of catalytic converters in petrol cars.
Significance of phasing out
- It is a milestone that will prevent more than 1.2 million premature deaths and save world economies over $2.4 trillion annually.
- It has taken 100 years to stop the use of leaded fuel finally.
Try answering this PYQ:
Q.Lead, ingested or inhaled, is a health hazard. After the addition of lead to petrol has been banned, what still are the sources of lead poisoning? (CSP 2012)
- Smelting units
- Pens pencils
- Paints
- Hair oils and cosmetics
Select the correct answer using the codes given below:
(a) 1, 2 and 3 only
(b) 1 and 3 only
(c) 2 and 4 only
(d) 1, 2, 3 and 4
Post your answers here.
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What are Oil Bonds?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Oil Bonds
Mains level: Oil prices volatility and its impact on India
The Centre has argued that it cannot reduce taxes on petrol and diesel as it has to bear the burden of payments in lieu of oil bonds issued by the previous UPA government to subsidize fuel prices.
What are Oil Bonds?
- Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.
- These bonds are typical of a long-term tenure like 15-20 years and oil companies are paid interest.
- Before the complete deregulation of petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.
- This ‘under-recovery is typically compensated through fuel subsidies allocated in the Union budget.
- However, between 2005 and 2010, the UPA government issued oil bonds to the companies amounting to Rs 1.4 lakh crore to compensate them for these losses.
Why do governments issue such bonds?
- Compensation to companies through issuance of such bonds is typically used when the government is trying to delay the fiscal burden of such a payout to future years.
- Governments resort to such instruments when they are in danger of breaching the fiscal deficit target due to unforeseen circumstances that lead to a collapse in revenues or a surge in expenditure.
- These types of bonds are considered to be ‘below the line’ expenditure in the Union budget and do not have a bearing on that year’s fiscal deficit, but they do increase the government’s overall debt.
- However, interest payments and repayment of these bonds become a part of the fiscal deficit calculations in future years.
Backgrounder: Deregulation of fuel prices
- Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of aviation turbine fuel in 2002, petrol in 2010, and diesel in 2014.
- Prior to that, the government would intervene in fixing the price at which retailers were to sell diesel or petrol.
- This led to under-recoveries for oil marketing companies, which the government had to compensate for.
- The prices were deregulated to make them market-linked, unburden the government from subsidizing prices, and allow consumers to benefit from lower rates when global crude oil prices tumble.
- Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices based on calculations of their own cost and profits.
- However, the key beneficiary in this policy reform of price decontrol is the government.
Impact: Loss of consumers
- While oil price deregulation was meant to be linked to global crude prices, Indian consumers have not benefited from a fall in global prices.
- The central, as well as state governments, impose fresh taxes and levies to raise extra revenues.
- This forces the consumer to either pay what she’s already paying, or even more.
Why are the Oil Bonds in news?
- As prices of petrol and diesel climb steeply, the Centre has been under pressure to cut the high taxes on fuel.
- Taxes account for 58 per cent of the retail selling price of petrol and 52 per cent of the retail selling price of diesel.
- However, the government has so far been reluctant to cut taxes as excise duties on petrol and diesel are a major source of revenue, especially at a time the pandemic has adversely impacted other taxes such as corporate tax.
- The government is estimated to have collected more than Rs 3 lakh crore from tax on petrol and diesel in the 2020-21 fiscal year.
The blame game
- The present government has blamed the UPA regime for its inability to cut taxes.
- It pointed out that the bonds issued by the Manmohan Singh government have weakened the financial position of the oil marketing companies and added to the government’s fiscal burden now.
- It is an argument that has been often repeated since 2018.
What budget documents show
- Budget documents show that such bonds will be up for redemption over the next few years — beginning with two to be redeemed in the current fiscal year — till 2026.
- The government has to repay a principal amount of Rs 10,000 crore this year, according to these documents.
- The government has paid around Rs 10,000 crore annually as interest over the last decade.
- The government is likely to pay a similar amount of interest for the current fiscal as well.
Is the issuance of such special securities restricted to the UPA era?
- Besides oil bonds, the UPA era also saw the issuance of fertilizer bonds from 2007 to compensate fertilizer companies for their losses due to the difference in the cost price and selling price.
- However, the issuance of such special securities is not limited to the UPA regime.
- Over the years, the Modi government has issued bank recapitalization bonds to specific public sector banks (PSBs) as it looked to meet the large capital requirements of these PSBs without allocating money from the budget.
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Second-generation bioethanol: It is time to launch it headlong
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Bioethanol, Ethanol blending
Mains level: Ethanol blended petrol (EBP) Program
India has been promoting 2G bioethanol to achieve its E20 target.
What is Bioethanol?
- Biomass has always been a reliable source of energy.
- Cultivated biomass has begun to be used to generate bioethanol.
- They are categorised as first (1G), second (2G) and third-generation (3G), based on the source of raw material used for bioethanol production.
Its types
- 1G bioethanol: Raw materials required are corn seeds and sugarcane; both are food sources. There is not enough food for everyone; so the use of 1G is a major concern. However, some countries have enough raw materials to manufacture 1G.
- 2G bioethanol: It can be produced using inedible farm waste left over after harvest. Corn cobs, rice husks, wheat straw and sugarcane bagasse can all be transformed into cellulose and fermented into ethanol that can then be mixed with conventional fuels.
- 3G bioethanol: Algae grown in wastewater, sewage or saltwater can be used to produce bioethanol. Water used for human consumption is not required. The benefit of 3G is that it does not compete with food. Nevertheless, economic viability remains a critical issue.
Ethanol blending in India
- India currently blends approximately 8.5 per cent ethanol with petrol.
- It is estimated that ethanol production in India will triple to approximately 10 billion litres per year by 2025.
- The 2G plant will play a major role in making bioethanol available for blending.
- In addition to reducing agricultural waste incineration, it can also help meet the goal of converting waste into energy.
Moves for production
- The first 2G ethanol biorefinery is being set up at Bathinda, Punjab.
- Hindustan Petroleum Corporation Ltd (HPCL) plans to set up four 2G ethanol plants that will convert agricultural waste into biofuel, reducing toxic air pollution in northern India.
- Additionally, HPCL has plans to build four plants to produce ethanol using grains, such as surplus maize, surplus rice and damaged grain.
Innovations in this field
- An Indian company has filed a patent for loop reactor technology.
- It is a long, serpentine tubular reactor, in which fermentable sugars are converted to ethanol with the help of brewer’s yeast.
- This sparked an idea to come up with reactive pipeline technology, wherein the pipeline connects the sugar factories where the ethanol is produced to the blending depot at the closest oil manufacturing companies.
- Reactive pipeline technology is poised to be a game-changer for sugar factories and grain-based distilleries since uninterrupted raw material supply is a major challenge.
Benefits offered by ethanol blending
(1) Energy security
- The Union government has emphasized that increased use of ethanol can help reduce the oil import bill.
- India’s net import cost stands at $551 billion in 2020-21. It is estimated that the E20 program can save the country $4 billion (Rs 30,000 crore) per annum.
(2) Emission reduction
- Use of ethanol-blended petrol decreases emissions such as carbon monoxide (CO), hydrocarbons (HC) and nitrogen oxides (NOx), the expert committee noted.
- Higher reductions in CO emissions were observed with E20 fuel — 50 per cent lower in two-wheelers and 30 per cent lower in four-wheelers.
Some issues to be addressed
(1) Fuel efficiency
- There is an estimated loss of six-seven per cent fuel efficiency for four-wheelers and three-four per cent for two-wheelers when using E20, the committee report noted.
- These vehicles are originally designed for E0 and calibrated for E10.
(2) Recalibrating engines
- The use of E20 will require new engine specifications and changes to the fuel lines, as well as some plastic and rubber parts due to the fuel’s corrosive nature.
- The engines, moreover, will need to be recalibrated to achieve the required power, efficiency and emission-level balance due to the lower energy density of the fuel.
Conclusion
- The country’s target of 20 per cent ethanol blending in petrol (E20) by 2025 can play a key role in reducing crude oil imports and bolstering India’s energy independence.
- But India may miss an earlier goal set by him in 2015 — of reducing crude oil import dependency 10 per cent by 2022.
- The target is far from being met and the country’s import dependency is only increasing.
- The country’s target of 20 per cent ethanol blending in petrol (E20) by 2025 can play a key role in reducing crude oil imports and bolstering India’s energy independence.
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Back2Basics: EBP Programme
- Ethanol Blended Petrol (EBP) programme was launched in January 2003 for the supply of 5% ethanol blended petrol.
- The programme sought to promote the use of alternative and environment-friendly fuels and to reduce import dependency for energy requirements.
- OMCs are advised to continue according to priority of ethanol from 1) sugarcane juice/sugar/sugar syrup, 2) B-heavy molasses 3) C-heavy molasses and 4) damaged food grains/other sources.
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National Hydrogen Mission
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hydrogen
Mains level: National Hydrogen Mission
During his I-Day speech, the PM has announced a National Hydrogen Mission and said India will become the world’s largest exporter of green hydrogen in the years to come.
National Hydrogen Mission
- The PM’s announcement takes forward the proposal, made in the 2021 Budget, for the launch of NHM that would enable the generation of hydrogen “from green power sources”.
- The added advantage of hydrogen is that, apart from transportation, it can be a “decarbonizing agent” for industries like chemicals, iron, steel, fertilizer and refining, transport, heat and power.
- While the details of the NHM are yet to emerge, India has taken several exploratory steps.
- India has been working on a pilot project on Blue Hydrogen, Hydrogen CNG (H-CNG), and Green Hydrogen.
- Several programs are focusing to blend hydrogen with compressed natural gas for use as a transportation fuel as well as an industrial input to refineries.
Hydrogen as a fuel
- Hydrogen is the fuel of stars and packs awesome energy. It is also the most abundant element in the universe.
- But on Earth, it is found in complex molecules such as water or hydrocarbons.
- Hydrogen is not a source of energy, like fossil fuels or renewable sources like sunlight and air, but an energy carrier, which means it has to be produced, or extracted, and stored before it can be used.
- But no matter how it is used, the by-product the burning of hydrogen produces is water.
How is Hydrogen produced?
- There are several ways of extracting hydrogen and, depending on the method, the hydrogen produced is classified as ‘grey’, ‘blue’, or ‘green’ hydrogen.
- According to WEC, as of 2019, 96 percent of hydrogen is produced from fossil fuels via carbon-intensive processes.
- Hydrogen thus obtained is called ‘grey’ hydrogen as the process, though not as expensive as the other methods, releases a lot of carbon dioxide.
What Is Grey, Blue, Green Of Hydrogen?
- ‘Grey’ hydrogen becomes ‘blue’ hydrogen when the CO2 given out during its production is locked up through carbon capture and storage (CCS) processes.
- But while the CO2 output is lowered, this process is quite expensive.
- ‘Grey’ and ‘blue’ hydrogen, thus, are both produced by the same processes, the only difference for ‘blue’ hydrogen being that the CO2 produced is sequestered.
- But it is ‘green’ hydrogen that governments are aiming at. This is any hydrogen that is produced from clean energy sources like renewables.
- ‘Green’ hydrogen is released via the electrolysis of energy from renewable sources. This process, though it gives rise to no CO2 emissions, is expensive and not commercially viable yet.
Key challenges
- Lack of infrastructure: India does not have enough storage capacity for the current state of domestic consumption.
- Safety concerns: Hydrogen is highly inflammable.
Way ahead
- Developing technologies to produce ‘green’ hydrogen is cost-intensive.
- However, falling renewable energy and fuel cell prices and stringent climate change requirements have provided an impetus for investments in this area.
- In India, the IITs, IISc, Benaras Hindu University, Council for Scientific and Industrial Research laboratories etc. are exploring different aspects of hydrogen production.
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Ujjwala 2.0 Scheme
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Ujjwala Scheme
Mains level: Not Much
Prime Minister has launched the second phase of the Ujjwala gas connection scheme for the poor and said it would provide the biggest relief to lakhs of migrant worker families in the country.
Ujjwala 2.0
- Under Ujjwala 2.0 migrant workers would no longer have to struggle to get address proof documents to get the gas connections, Mr. Modi said.
- Now migrant workers would only be required to submit a self-declaration of their residential address to get the gas connection.
- Along with a deposit-free LPG connection, Ujjwala 2.0 will provide the first refill and a hotplate free of cost to the beneficiaries.
About the PM Ujjwala Yojana
- Pradhan Mantri Ujjwala Yojana (PMUY) was launched in 2016, with the aim to provide Liquefied petroleum gas (LPG) connections to five crore women members of below poverty line (BPL) households in the first phase.
- he scheme was expanded in April 2018 to include women beneficiaries from seven more categories (SC/ST, PMAY, AAY, Most backward classes, tea garden, forest dwellers, Islands).
- In the second phase the target was expanded to eight crore LPG connections.
Significance of Ujjwala 2.0
- LPG infrastructure has expanded manifold in the country due to the Ujjwala scheme.
- In the last six years, more than 11,000 new LPG distribution centres have opened across the country.
- The LPG coverage in India is now very close to becoming 100 per cent.
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No fossil fuels as usual
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Oil recovery rate
Mains level: Paper 3- Balancing the energy needs dependent on fossil fuel and environmental concerns
Context
The spread and speed of the destruction caused by climate change in recent weeks present our new Minister of Petroleum and Natural Gas with a policy dilemma. The article offers five policy suggestions to deal with the dilemma.
Energy dilemma facing India
- The events of the past month all over the world have caught even the most alarmist of climate scientists by surprise.
- These events brought into sharp relief the reality that there was no option of denying the consequential implications of the use of fossil fuels.
- However, the dilemma India faces lies in the fact that the Indian economy is heavily dependent on fossil fuels and there is no end in sight to this dependence.
- Further, India imports approximately 85 percent of its crude oil requirements and is exposed to the volatility of the international oil market.
Five policy changes needed
1) Reduce emphasis on domestic exploration
- Not easy to locate and difficult to develop: A review of the public sector’s exploration and production (EP) track record suggests that whilst India may well be sitting on substantial hydrocarbon reserves, these reserves are not easy to locate and, even when located, difficult to develop and produce on a commercial basis.
- The government has often compounded this economic challenge by placing administrative limits on marketing by companies and their pricing freedom.
- High risk and structural softness in the market: The fundamental point is that EP in India is a high-risk activity, and this risk is even greater today because of the longer-term structural softness of the petroleum market.
- The resources earmarked for exploration can be deployed more productively elsewhere.
2) Increase productivity of producing fields
- The ONGC needs to allocate increasing resources to improving the productivity of its producing fields.
- Low oil recovery rate: The average oil recovery rate in India was around 28 percent that is, for every 100 molecules discovered, only 28 were monetized.
- This number did not compare well with the global average of around 45 percent for fields of comparable geology.
- Use technology: The application of enhanced oil recovery (EOR) technology offers a relatively low-risk avenue for increasing domestic production.
3) Increase strategic reserves
- We hold currently strategic reserves equivalent to 12 days of imports.
- The government has approved plans to increase this buffer to 25 days.
- By comparison, China, the EU, South Korea, and Japan hold between 70-100 days of reserves.
- A significant portion of our oil imports came from the Middle East, predominantly Saudi Arabia, Iraq, and Iran.
- This region faces deep political and social fault lines and there is no knowing when our supply lines might get ruptured.
- We would, therefore, be well-advised to build contingency safeguards.
4) Restructure and reorganize public sector petroleum companies
- Consolidate upstream assets: In the first instance, the upstream assets should be consolidated under ONGC (the upstream assets of BPCL, IOC, HPCL, and GAIL should pass onto ONGC) and GAIL should be unbundled into a public utility gas pipeline company
- Diversify: Thereafter, these companies should be encouraged to look beyond hydrocarbons to build an “energy” enterprise.
- The restructuring will help cut back the “avoidable” costs of intra public sector competition.
- It will also reduce the inefficiencies of “sub-scale” operations.
- It will provide a focused platform for balancing the shorter-term need to provide secure and affordable hydrocarbons with the medium and longer-term imperative of developing clean energy.
5) Avoid siloed thinking
- The petroleum minister should not see his responsibility through the siloed prism of oil and natural gas.
- He should broaden the aperture and become the progenitor of the energy transition.
Conclusion
The dilemma referred to in the opening sentence will be easier to resolve our priorities are set within the framework of clean energy.
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Strategic Petroleum Reserves
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Strategic Petroleum Reserves Programme
Mains level: Oil prices volatility and its impact on India
Under Phase II of the petroleum reserve program, the Government has approved two additional commercial-cum-strategic facilities at Chandikhol (Odisha) and Padur (TN) on Public-Private Partnership (PPP) model.
Strategic Petroleum Reserves Programme
- To ensure energy security, the govt had decided to set up 5 million metric tons (MMT) of strategic crude oil storage at three locations namely, Visakhapatnam, Mangalore, and Padur (near Udupi).
- These strategic storages would be in addition to the existing storage of crude oil and petroleum products with the oil companies and would serve as a cushion during any supply disruptions.
- The petroleum reserves established are strategic, and the crude oil stored in these reserves will be used during an oil shortage event, as and when declared so by the Government of India.
- The construction of the Strategic Crude Oil Storage facilities is being managed by Indian Strategic Petroleum Reserves Limited (ISPRL), a Special Purpose Vehicle.
Why need SPR?
- The Gulf War in 1990 caused a sharp rise in oil prices and a massive increase to India’s imports.
- During the subsequent 1991 Indian economic crisis, foreign exchange reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations.
- India was able to resolve the crisis through policies that liberalized the economy. However, India continued to be impacted by the volatility of oil prices.
- In 1998, the AB Vajpayee administration proposed building petroleum reserves as a long-term solution to managing the oil market.
- Three storage facilities were built in underground locations in Mangalore, Visakhapatnam and Padur.
Construction of ISPR
- The crude oil storages are constructed in underground rock caverns and are located on the East and West coasts of India.
- Crude oil from these caverns can be supplied to the Indian Refineries either through pipelines or through a combination of pipelines and coastal movement.
- Underground rock caverns are considered the safest means of storing hydrocarbons.
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Nord Stream 2 Pipeline Project
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Nord Stream 2 Pipeline
Mains level: Not Much
The US, which had previously imposed sanctions to prevent the completion of a major new gas pipeline between Russia and Germany, has now signaled its approval for the project.
Nord Stream 2 Pipeline
- It is a system of offshore natural gas pipelines running under the Baltic Sea from Russia to Germany.
- It includes two active pipelines running from Vyborg to Lubmin near Greifswald forming the original Nord Stream, and two further pipelines under construction running from Ust-Luga to Lubmin termed Nord Stream 2.
- In Lubmin the lines connect to the OPAL line to Olbernhau on the Czech border and to the NEL line to Rehden near Bremen.
- The first line Nord Stream-1 was laid and inaugurated in 2011 and the second line in 2012.
- At 1,222 km in length, Nord Stream is the longest sub-sea pipeline in the world, surpassing the Langeled pipeline.
Why is the pipeline controversial?
- The US believed that the project would increase Europe’s dependence on Russia for natural gas.
- Currently, EU countries already rely on Russia for 40 percent of their gas needs.
- The project also has opponents in eastern Europe, especially Ukraine, whose ties with Russia have seriously deteriorated in the aftermath of the Crimean conflict in 2014.
- There is an existing land pipeline between Russia and Europe that runs through Ukraine.
- The country feels that once Nord Storm 2 is completed, Russia could bypass the Ukrainian pipeline, and deprive it of lucrative transit fees of around $3 billion per year.
- Ukraine also fears another invasion by Russia once the new pipeline is operational.
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OPEC+ seeks consensus on oil output
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC, OPEC Plus
Mains level: Global crude oil pricing mechanisms
OPEC+ has failed to reach a deal on oil output policy because the United Arab Emirates blocked some aspects of the pact.
About OPEC
- OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
- It is headquartered in Vienna, Austria.
- OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
- Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.
What is OPEC+?
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Must read:
Concerns for India
- Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs, threatening the demand-driven recovery.
- India imports about 84% of its oil and relies on West Asian supplies to meet over three-fifths of its demand.
- As one of the largest crude-consuming countries, India is concerned that such actions by producing countries have the potential to undermine consumption-led recovery.
- This would hurt consumers, especially in our price-sensitive market.
Answer this PYQ in the comment box:
Q.The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of (CSP 2020):
(a) Crude oil
(b) Bullion
(c) Rare earth elements
(d) Uranium
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Emerging crisis of obtaining Helium in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Helium and its practical uses
Mains level: Helium imports of India
India imports helium for its needs and with the U.S. appearing set to cut off exports of helium since 2021, the Indian industry stands to lose out heavily.
Helium is not just for balloons but it is the key ingredient for India’s high technology and the most sophisticated medical diagnosis.
Helium on Earth
- Helium is a chemical element with the symbol He and atomic number 2.
- It is a colourless, odourless, tasteless, non-toxic, inert, monatomic gas, the first in the noble gas group in the periodic table. Its boiling point is the lowest among all the elements.
Its discovery
- In 1906 a young Englishman by the name of Moris Travers arrived in Bangalore, to take up the position of the Director of Indian Institute of Science.
- Travers extracted helium in small quantity by heating up monazite sand abundantly available in Kerala beach, in a pioneering effort.
- Dutch physicist Kamerlingh Onnes liquefied Helium by cooling the gas to -270 degrees Celsius.
- It is known that Onnes collected helium gas from the springs of Bath in Baden Baden, Germany for his liquefaction experiment.
Helium in India
- India’s Rajmahal volcanic basin is the storehouse of helium trapped for billions of years, since the very birth of our Earth from the Sun.
- At present, researchers are mapping the Rajmahal basin extensively for future exploration and harnessing of helium.
Why India needs Helium?
- Every year, India imports helium worth Rs 55,000 crores from the U.S. to meet its needs.
- Helium is used in medicine, scientific research, for blimp inflation, party balloons as well as having welding applications.
- It finds many applications, mainly in magnetic resonance imaging (MRI) scans, in rockets and in nuclear reactors.
US monopoly in Helium
- The U.S. became the most important exporter of helium across the world.
- It was soon realized that the U.S. was also the biggest storehouse of helium.
- The US is now planning to switch off the export of helium from 2021.
- Qatar is a possible exporter but acute political and diplomatic wrangles have made Qatar unreliable.
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[pib] SATAT Scheme
Note4Students
From UPSC perspective, the following things are important :
Prelims level: SATAT Scheme, CBG
Mains level: SATAT scheme
Oil and Gas Marketing Companies (OGMCs) are inviting potential entrepreneur to procure Compressed Bio Gas (CBG) under the SATAT scheme.
Try this MCQ:
Q.SATAT is an initiative of the Government of India, aims at:
(a) Promoting Self Help Groups in rural areas
(b) Providing financial and technical assistance to young start-up entrepreneurs
(c) Promoting affordable transportation
(d) Providing affordable and quality education to the citizens for free
SATAT Scheme
- SATAT stands for Sustainable Alternative Towards Affordable Transportation.
- It is an initiative aimed at setting up Compressed Bio-Gas production plants and makes them available in the market for use in automotive fuels by inviting Expression of Interest from potential entrepreneurs.
- The initiative was launched in October 2018 by the Ministry of Petroleum & Natural Gas in association with the PSUs- Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.
Its implementation
- CBG plants are proposed to be set up mainly through independent entrepreneurs.
- CBG produced at these plants will be transported through cascades of cylinders to the fuel station networks of OMCs for marketing as a green transport fuel alternative.
- The 1,500-strong CNG stations network in the country currently serves about 32 lakh gas-based vehicles.
- The entrepreneurs would be able to separately market the other by-products from these plants, including bio-manure, carbon-dioxide, etc., to enhance returns on investment.
- So far 9 CBG plants have been commissioned and started supply of CBG under the scheme.
- These plants are located in Andhra Pradesh (1No.), Gujarat (3 No.), Haryana (1 No.), Maharashtra (3 No.) and Tamil Nadu (1No.).
Benefits of the programme
There are multiple benefits from converting agricultural residue, cattle dung and municipal solid waste into CBG on a commercial scale:
- Responsible waste management, reduction in carbon emissions and pollution
- Additional revenue source for farmers
- Boost to entrepreneurship, rural economy and employment
- Support to national commitments in achieving climate change goals
- Reduction in import of natural gas and crude oil
- Buffer against crude oil/gas price fluctuations
Back2Basics: Compressed Bio Gas (CBG)
- Biogas is produced naturally through a process of anaerobic decomposition from waste / bio-mass sources like agriculture residue, cattle dung, sugarcane press mud, municipal solid waste, sewage treatment plant waste, etc.
- After purification, it is compressed and called CBG, which has a pure methane content of over 95%.
- CBG is exactly similar to the commercially available natural gas in its composition and energy potential.
- With calorific value (~52,000 KJ/kg) and other properties similar to CNG, CBG can be used as an alternative, renewable automotive fuel.
- Given the abundance of biomass in the country, CBG has the potential to replace CNG in automotive, industrial and commercial uses in the coming years.
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What is OPEC+?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC+
Mains level: India's oil import
India, the world’s third-biggest oil importer, has said that the decision by major producers to continue with output cuts as prices move higher could threaten the consumption led-recovery in some countries.
Try this PYQ:
Q.The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of
(a) Crude oil
(b) Bullion
(c) Rare earth elements
(d) Uranium
What is the news?
- The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, agreed not to increase supply in April as they await a more substantial recovery in demand amid the COVID-19.
- Crude prices rose after the announcement and are up 33% this year (meanwhile India flaring up prices to 100 Rs/litres for Petrol).
What is OPEC+?
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Concerns for India
- Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs, threatening the demand-driven recovery.
- India imports about 84% of its oil and relies on West Asian supplies to meet over three-fifths of its demand.
- As one of the largest crude-consuming countries, India is concerned that such actions by producing countries have the potential to undermine consumption-led recovery.
- This would hurt consumers, especially in our price-sensitive market.
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Why are Petrol, Diesel prices rising?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Impact of fuel prices on inflation
Mains level: Global oil price dynamics
Diesel and petrol prices have hit record highs across the country.
Govt explanation
- The government reasons that global crude oil prices have risen by more than 50 per cent to over $63.3 per barrel since October, forcing oil retailers to increase pump prices.
- That, however, is only partly true.
- Indian consumers are already paying much higher than what they were paying last January, even though crude prices are yet to reach levels of early last year.
Note: Petrol and diesel do not come under the purview of goods and services tax (GST).
Fuel price dynamics in India
- Retail petrol and diesel prices are in theory decontrolled — or linked to global crude oil prices.
- It means that if crude prices fall retails prices should come down too, and vice versa.
- But this does not happen in practice, largely because oil price decontrol is a one-way street in India.
- When global crude oil prices fall and prices slide, the government slaps fresh taxes and levies to ensure that it rakes in extra revenues.
- The consumer should have ideally benefited by way of lower pump prices, is forced to either shell out what she’s already paying or spend even more for every litre of fuel.
- The main beneficiary in this subversion of price decontrol is the government.
Why crude oil prices are rising now?
- Prices collapsed in April 2020 after the pandemic spread around the world, and demand fell away.
- But as economies have reduced travel restrictions and factory output has picked up, global demand has improved, and prices have been recovering.
- The controlled production of crude amid rising demand has been another key factor in boosting oil prices, with Saudi Arabia voluntarily cutting its daily output.
What is the impact of taxes on retail prices of auto fuels?
- The central government hiked the central excise duty on petrol to Rs 32.98 per litre during the course of last year from Rs 19.98 per litre at the beginning of 2020.
- It increased the excise duty on diesel to Rs 31.83 per litre from Rs 15.83 over the same period to boost revenues as economic activity fell due to the pandemic.
- A number of states have also hiked sales tax on petrol and diesel to shore up their revenues.
How much tax do we pay now?
Currently, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi.
How will these hikes impact inflation?
- Experts note that the impact of rising fuel inflation has been counterbalanced by declining food inflation, but that consumers with greater expenditure on travel are feeling the pinch of higher prices.
- Rising fuel inflation may pinch consumers who have to travel further for work and have access to affordable cereals etc.
- The urban population would be more impacted by rising fuel prices than the rural population — however, a weak monsoon may lead to rural India being hit as farmers are forced to rely more on diesel-powered irrigation.
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Significance of crude oil crossing $60 a barrel
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Crude oil prices dynamics
Mains level: India's oil import bill
The price of Brent crude crossed the $60 per barrel mark after over a year on the back of oil-producing countries maintaining production cuts due to lockdowns.
What is Crude Oil?
- Petroleum also known as crude oil and oil is a naturally occurring, yellowish-black liquid found in geological formations beneath the Earth’s surface.
- It is commonly refined into various types of fuels.
- Components of petroleum are separated using a technique called fractional distillation, i.e. separation of a liquid mixture into fractions differing in boiling point by means of distillation, typically using a fractionating column.
- It consists of naturally occurring hydrocarbons of various molecular weights and may contain miscellaneous organic compounds.
- The name petroleum covers both naturally occurring unprocessed crude oil and petroleum products that are made up of refined crude oil.
Why has the price of crude oil risen sharply?
- Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.
- However oil-producing countries have continued to limit production despite an increase in prices with Saud Arabia cutting its own oil production by 1 million barrels per day to strengthen crude oil prices.
- Expectations of strong improvements in demand with the global rollout of the Covid-19 vaccine have also put upward pressure on crude oil prices according to experts.
How will this impact India?
- The rise in the price of Brent crude will lead to an increase in India’s import bill.
- India imports of 80 per cent of its crude oil requirements and the average price of Indian basket of crude oil has already risen to $54.8 barrel for January.
- The upward move in crude prices will also put upward pressure on petrol and diesel prices across the country which is already at all-time highs.
Signs of no remedy
- The government had hiked central taxes on petrol and diesel by Rs 13 per litre and Rs 11 per litre in 2020 to boost revenues amid lower economic activity.
- The increase in taxes had prevented consumers from getting the benefit of low fuel prices as international prices crashed during the first quarter of last fiscal.
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[pib] International Energy Agency (IEA)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: International Energy Agency
Mains level: Not Much
The Framework for Strategic Partnership between the International Energy Agency (IEA) members and India was signed yesterday to strengthen mutual trust and cooperation & enhance global energy security, stability and sustainability.
Try this MCQ:
Q.The Global Energy Transition Index recently seen in news is released by:
a) International Energy Agency (IEA)
b) World Economic Forum (WEF)
c) International Renewable Energy Agency (IRENA)
d) International Solar Alliance
International Energy Agency
- The IEA is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development (OECD) in 1974 in the wake of the 1973 oil crisis.
- It was initially dedicated to responding to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market and other energy sectors.
- At the end of July 2009, IEA member countries held a combined stockpile of almost 4.3 billion barrels of oil.
- They are required to maintain total oil stock levels equivalent to at least 90 days of the previous year’s net imports.
- The IEA acts as a policy adviser to its member states but also works with non-member countries, especially China, India, and Russia.
- The Agency’s mandate has broadened to focus on the “3Es” of effectual energy policy: energy security, economic development, and environmental protection.
Greater role play
- The latter has focused on mitigating climate change.
- The IEA has a broad role in promoting alternate energy sources (including renewable energy), rational energy policies, and multinational energy technology co-operation.
Why need a partnership with IEA?
- This partnership will lead to an extensive exchange of knowledge and would be a stepping stone towards India becoming a full member of the IEA.
- India and the IEA members will work as Energy Security, Clean & Sustainable Energy, Energy Efficiency, Enhancing petroleum storage capacity in India, Expansion of gas-based economy in India, etc.
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[pib] Kochi – Mangaluru Natural Gas Pipeline
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Natural Gas
Mains level: Natural gas as an alternative fuel
PM will today dedicate the Kochi – Mangaluru Natural Gas Pipeline to the nation.
Try this PYQ:
Q. Consider the following statements:
- Natural gas occurs in the Gondwana beds.
- Mica occurs in abundance in Kodarma.
- Dharwars are famous for petroleum.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 only
(c) 2 and 3 only
(d) None
Kochi – Mangaluru Pipeline
- The 450 km long pipeline has been built by GAIL (India) Ltd.
- It has a transportation capacity of 12 Million Metric Standard Cubic Metres per day.
- It will carry natural gas from the Liquefied Natural Gas (LNG) Regasification Terminal at Kochi (Kerala) to Mangaluru (Dakshina Kannada district, Karnataka).
- It will pass through Ernakulam, Thrissur, Palakkad, Malappuram, Kozhikode, Kannur and Kasaragod districts.
Its significance
- The event marks an important milestone towards the creation of ‘One Nation One Gas Grid’.
- The pipeline will supply environment-friendly and affordable fuel in the form of Piped Natural Gas (PNG) to households and Compressed Natural Gas (CNG) to the transportation sector.
- It will also supply Natural Gas to commercial and industrial units across the districts along the pipeline.
- Consumption of cleaner fuel will help in improving air quality by curbing air pollution.
Back2Basics: Natural Gas
- Natural gas is a fossil fuel source consisting primarily of methane.
- It is the cleanest among all the available fossil fuels.
- It is used as a feedstock in the manufacture of fertilizers, plastics and other commercially important organic chemicals as well as used as a fuel for electricity generation, heating purpose in industrial and commercial units.
- Natural gas is also used for cooking in domestic households and a transportation fuel for vehicles.
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Gas Production in Krishna-Godavari Basin
Note4Students
From UPSC perspective, the following things are important :
Prelims level: KG basin, Natural Gas
Mains level: Oil and gas reserves in KG basin
Reliance Industries Ltd and BP (British Petroleum) have announced the start of gas production from the R cluster of the KG Basin, the deepest off-shore gas field in Asia.
Must read
https://www.civilsdaily.com/burning-issue-natural-gas-marketing-reforms/
Krishna-Godavari Basin
- The Krishna Godavari Basin is a proven petroliferous basin of continental margin located on the east coast of India.
- Its onland part covers an area of 15000 sq. km and the offshore part covers an area of 25,000 sq. km up to 1000 m isobath.
- The basin contains about 5 km thick sediments with several cycles of deposition, ranging in age from Late Carboniferous to Pleistocene.
- The major geomorphologic units of the Krishna Godavari basin are Upland plains, Coastal plains, Recent Flood and Delta Plains.
Minerals found
- KG inland and offshore basins have good prospects of tight oil and tight gas reserves from the conducted field studies.
- The first gas discovery in the basin was in 1983.
- Most of the conventional wells drilled and operated have a shorter lifespan than envisaged life and with erratic production.
- This may be due to drilling of conventional wells in tight oil and gas fields without horizontal drilling in the shale rock formations and hydraulic fracturing.
Note: Tight gas and tight oil are produced from reservoir rocks with such low permeability that considerable hydraulic fracturing is required to harvest the well at economic rates.
The KGD6 block
- Krishna Godavari Dhirubhai 6 (KG-D6) was Reliance’s first offshore gas field development and its first underwater discovery.
- It was also India’s largest deposit of natural gas and the largest such discovery in the world in 2002.
- The project takes its name from India’s Krishna-Godavari Basin, which covers more than 19,000 square miles (50,000 square kilometres) in Andhra Pradesh and production block D6 in the Bay of Bengal.
Why is this important?
- The R cluster, along with the Satellite Cluster and MJ gas fields in the KG Basin is expected to produce around 30 MMSCMD (million standard cubic metres per day) of natural gas.
- This is about 15% of India’s projected demand for natural gas by 2023.
Do they impact India’s energy security efforts?
- The three projects are a key part of the plan to boost domestic production of natural gas to increase the share of natural gas in India’s energy basket from 6.2% now to 15% by 2030.
- Increased domestic production of natural gas is an important aspect of reducing India’s dependence on imports and improves energy security.
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[pib] XP100: The premium grade Petrol
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Octane number
Mains level: India's oil sector
The Ministry of Petroleum & Natural Gas has launched world-class premium-grade Petrol (with Octane number 100) in the country.
What is XP100?
- It is petrol developed by Indian Oil with octane number 100.
- The availability of XP100 puts India in an elite group of countries, having access to such high-quality oil. It will provide high quality and power to the engine.
- It will be rolled out in 15 identified cities across the country in two phases.
- Worldwide, 100 Octane petrol has a niche market for luxury vehicles that demand high performance and is available only in six countries like Germany, USA, etc.
Try this PYQ:
Q.Lead, ingested or inhaled, is a health hazard. After the addition of lead to petrol has been banned, what still are the sources of lead poisoning?
- Smelting units
- Pens pencils
- Paints
- Hair oils and cosmetics
Select the correct answer using the codes given below:
(a) 1, 2 and 3 only
(b) 1 and 3 only
(c) 2 and 4 only
(d) 1, 2, 3 and 4
What is Octane numbering of Petrol?
- Octane number, also called Antiknock Rating, a measure of the ability of a fuel to resist knocking when ignited in a mixture with air in the cylinder of an internal-combustion engine.
- Engine knock is a tapping, pinging sound that gets louder and more obnoxious as we accelerate.
- The octane number is determined by comparing, under standard conditions, the knock intensity of the fuel with that of blends of two reference fuels: iso-octane, which resists knocking, and heptane, which knocks readily.
- The octane number is the percentage by volume of iso-octane in the iso-octane–heptane mixture that matches the fuel being tested in a standard test engine.
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What is OPEC+?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC + members
Mains level: Global oil price dynamics
Oil prices jumped by close to 10% for its biggest daily gain in almost six months after news of a highly effective vaccine against COVID-19 and Saudi Arabia’s assurance that an OPEC+ oil output deal could be adjusted to balance the market.
About OPEC
- OPEC stands for Organization of the Petroleum Exporting Countries.
- It is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
- It is headquartered in Vienna, Austria.
- OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
- Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.
What is OPEC+?
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Why OPEC plus came into existence?
- When Russia concluded the Vienna Agreement in 2016, the Russian leadership believed that it would help prepare the country for the Russian presidential elections in March 2018.
- Higher oil prices ensured the Kremlin’s financial capacity to lead a successful electoral campaign.
- This changed the regime’s priorities – from satisfying the needs of the general population to ensuring the sustainability of the Kremlin’s alliance with powerful tycoons, including that controlling oil production.
- For Saudi Arabia, turning what had been an ad hoc coalition into a formal group provides a hedge (protection) against future oil-market turbulence.
- For Russia, the formalization of the group helps expand Putin’s influence in the Middle East
- However, both reportedly aimed at causing a drop in oil prices in order to hit US shale producers, who have continued to benefit from OPEC production cuts by expanding their market share.
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What is Winter Diesel?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Winter grade diesel
Mains level: Not much
India’s armed forces may soon be using winter diesel for operations in high altitude areas such as Ladakh, where winter temperatures plummet to extremely low as -30° Celsius.
This year BS-VI compliant fuel was in news. Try differentiating the Winter Diesel with the BS-VI fuel.
What is Winter Diesel?
- Winter diesel is a specialised fuel that was introduced by Indian Oil Corp. Ltd. last year specifically for high altitude regions and low-temperature regions such as Ladakh, where ordinary diesel can become unusable.
- The flow characteristics of regular diesel change at such low temperatures and using it may be detrimental to vehicles.
- Winter diesel which contains additives to maintain lower viscosity can be used in temperatures as low as -30°C and that besides a low pour point, it had higher cetane rating — an indicator is the combustion speed of diesel and compression needed for ignition.
- It has lower sulphur content, which would lead to lower deposits in engines and better performance.
Back2Basics: BS-VI fuel
- Sulphur content in fuel is a major cause for concern. Sulphur dioxide released by fuel burning is a major pollutant that affects health as well.
- BS-VI fuel’s sulphur content is much lower than BS-IV fuel.
It is reduced to 10 mg/kg max in BS-VI from 50 mg/kg under BS-IV.
This reduction makes it possible to equip vehicles with better catalytic converters that capture pollutants. However, BS-VI fuel is expected to be costlier that BS-IV fuel.
With inputs from:
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Why India is producing less and less oil?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OALP
Mains level: India's oil sector
India’s crude oil production fell 7.1% in May 2020 compared to May 2019 on the back of low demand due to the Covid-19 pandemic.
Practice question for mains:
Q.Discuss the impact of Covid-19 pandemic on the global crude oil dynamics.
Crude oil exploration in India
- Crude oil production in India is dominated by two major state-owned exploration and production companies, ONGC and Oil India.
- These companies are the key bidders for crude oil block auctions and end up acquiring most of the blocks that are put up for auction in India.
Falling production
- Domestic production of crude has been falling every year since FY 2012.
- This has led to a steady climb in the proportion of imports in domestic crude oil consumption from 81.8% in 2012 to 87.6% in 2020.
Why is production falling?
- Most of India’s crude oil production comes from ageing wells that have become less productive over time.
- A lack of new oil discoveries in India coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production making dependency on imports.
- The output of these ageing wells is declining faster than new wells can come up according to experts.
- Domestic exploration companies are attempting to extend the life of currently operational wells.
Why are there not more private players?
- There has been a lack of interest in exploration and production in India from major private players, particularly those based abroad.
- According to experts, this is because of long delays in the operationalization of production even after an oil block is allotted due to delays in approvals.
- Some of the key approvals which are required to begin production include environmental clearances and approval by the Directorate General of Hydrocarbons after the allottee completes a seismic survey and creates a field development plan.
What policy changes could help?
- Existing public and private sector players have asked for reduced levies of oil production including oil cess, royalties, and profit petroleum especially when crude oil prices are below $45/barrel.
- Experts say the requirement to pay royalties to the government at low crude prices can make it unviable for these companies to invest in further exploration and production.
OALP could help
- The government introduced the Open Acreage Licensing Programme (OALP) in 2019 to allow companies to carve out blocks that they are interested in and with lower royalties and no oil cess.
- However, existing players are calling for a relaxation of royalties and oil cess on block allotted under previous policies.
- The Chinese government offered a floor price to oil producers insulating them somewhat from any sharp falls in international crude prices.
- This kind of policy at least allows for a company to have a fixed worst-case scenario for the sale of crude oil attracts more investment in exploration and production.
Back2Basics: OALP
- The OALP, a part of the government’s Hydrocarbon Exploration and Licensing Policy (HELP), gives exploration companies the option to select the exploration blocks on their own, without having to wait for the formal bid round from the Government.
- The company then submits an application to the government, which puts that block up for bid.
- OALP offers single license to explore conventional and unconventional oil and gas resources to propel investment in and provide operational flexibility to the investors.
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Indian Gas Exchange (IGX): the first nationwide online delivery-based gas trading platform
Note4Students
From UPSC perspective, the following things are important :
Prelims level: IGX
Mains level: Utility of the IGX
India’s first gas exchange — the Indian Gas Exchange (IGX) — was launched by the Ministry of Petroleum. The exchange is expected to facilitate transparent price discovery in natural gas, and facilitate the growth of the share of natural gas in India’s energy basket.
Note the following things with caution from the newscard:
-
IGX allows only imported LNG and not domestically produced natural gas.
-
India’s import of LNG
-
GAIL
-
Taxation of LNG
What is IGX?
- The IGX is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas.
- It will allow trading across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
- Imported Liquefied Natural Gas (LNG) will be regassified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.
- The exchange also allows much shorter contracts – for delivery on the next day, and up to a month – while ordinarily contracts for natural gas supply are as long as six months to a year.
- This will mean that buyers do not have to contact multiple dealers to ensure they find a fair price.
Will domestically produced natural gas also be bought and sold on the exchange?
- The price of domestically produced natural gas is decided by the government. It will not be sold on the gas exchange.
- However, following appeals by domestic producers that the prices set by the government are not viable given the cost of exploration and production in India.
- A new gas policy will include reforms in domestic gas pricing and will move towards more market-oriented pricing.
Will this make India more import-dependent?
- Domestic production of gas has been falling over the past two fiscals as current sources of natural gas have become less productive.
- Domestically produced natural gas currently accounts for less than half the country’s natural gas consumption; imported LNG accounts for the other half.
- LNG imports are set to become a larger proportion of domestic gas consumption as India moves to increase the proportion of natural gas in the energy basket from 6.2% in 2018 to 15% by 2030.
What regulatory change is required?
- Currently, the pipeline infrastructure necessary for the transportation of natural gas is controlled by the companies that own the network.
- State-owned GAIL owns and operates India’s largest gas pipeline network, spanning over 12,000 km.
- An independent system operator for natural gas pipelines would help ensure transparent allocation of pipeline usage, and build confidence in the minds of buyers and sellers about neutrality in the allocation of pipeline capacity.
- Experts have also called for natural gas to be included in the Goods and Services Tax (GST) regime to avoid buyers having to deal with different levies such as VAT across states when purchasing natural gas from the exchange.
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How fuel price decontrol works — or why consumers always lose out
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Sweet and Sour grade crude oil
Mains level: Fuel prices hike and their impact
India fuel prices are somewhat stagnant these days despite spikes in global crude oil prices. The key beneficiary in this subversion of price decontrol is the government. The consumer is a clear loser, alongside fuel retailing companies as well. Let’s see how.
Do you know?
Grade of crude oil processed in Indian refineries: ‘Sour grade’ (Oman and Dubai average) and ‘Sweet grade’ (Brent)
Oil and India
- In theory, retail prices of petrol and diesel in India are linked to global crude prices.
- There is supposed to be complete decontrol of consumer-end prices of auto fuels and others such as the aviation turbine fuel or ATF.
- It means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.
So, why is there a divergence in the trends?
- Oil price decontrol is a one-way street in India — when global prices go up, this is passed on to the consumer, who has to cough up more for every litre of fuel consumed.
- But when the reverse happens and prices go down, the government — almost by default — slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer, who should have ideally benefited by way of lower pump prices.
How does decontrol work?
- Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost and profits.
- Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October 2014.
- Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol.
- While fuels such as domestic LPG and kerosene still are under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil.
Are India’s taxes on fuels high? Obviously, Yes!
- On May 5, the Centre announced one of the steepest ever hikes in excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol, following up on another round of sharp hikes in the first week of March.
- All of this effectively cements India’s position as the country with among the highest taxes on fuel.
- Prior to the increase in excise duty (in February 2020), the government, centre plus states was collecting around 107 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 69 per cent in the case of diesel.
- With the second revision in excise duty in May, the government is collecting around 260 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 256 per cent in the case of diesel (as on 6th May 2020), according to estimates by CARE Ratings.
- In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the UK, 45 per cent in Japan and under 20 per cent in the US.
Do OMCs also benefit?
- The only entity that benefits at the consumer’s expense is the government — in fact, both the Central and state governments.
- OMCs, interestingly, are also among the losers from the sharp downward gyrations in oil prices.
- The problem for companies such as IOC or BPCL is that a continuous slide in fuel prices leads to the prospect of inventory losses.
- It is a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery.
- Including both crude oil and products, companies such as IOC keep an inventory of about 20-50 days.
Also read:
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Is India prepared for crude oil eventualities?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Import of crude oil and its proportion in total consumption.
Mains level: Paper 3- Energy security.
The era we are living in is reigned by the uncertainties. And the oil market is not immune to these uncertainties. Against this background, India’s energy security is discussed in this article. Switching to the “just in case” needs with respect to crude oil is suggested by the author. But, that would require capital. So, how could the problem of capital be solved? Read the article to know…
Switching from just in time to just in case
- The post-COVID “world (will be) switching from just in time to just in case” said economist Alan Kirman.
- This is more so for the Indian petroleum sector.
- The decision-makers of this sector should switch to a “just in case” policy mode.
Oil market: Land full of uncertainties
- The oil market is in no man’s land. Few speak with conviction about its future trajectory.
- Last month, it dropped into negative territory for a day in the USA.
- But today the price of the same crude quality is above $30/barrel.
- If one reads the commentary of experts, some predict that prices will soon cross $50/barrel while some predict price-crash to below $20/barrel.
- The fine print of these reports is always caveated with the disclaimer, “it all depends” on one or more of the comparably uncertain variables.
- These variables include economic growth, geopolitics — US-China relations, the timing of the development of an anti-COVID vaccine or a combination of all these variables.
- The fact is no one really knows how the petroleum sector will fare in the “new normal” of the post-COVID world.
The problems policy-makers face: some known, some unknown
- Policy-makers know that irrespective of the twists and turns in the petroleum market, India will need fossil fuels (coal, oil and gas) to drive its economic growth for at least the next decade, if not longer.
- And that a sizeable percentage of these requirements will have to be imported.
- The country does not have the geology to expect gushers especially in an environment of volatile (and relatively low) oil prices.
- What must also be discomforting is the “known unknown” of the post-COVID stress.
- They know that COVID has knocked the props from under the Indian economy.
- They also know that every petroleum company, irrespective of whether it is in the private or public sector, will face an increasingly uncertain and challenging future business environment.
- What they do not know is the nature of these challenges, and therefore, the conditions, sine qua non, for managing them.
Let’s look at some facts and figures of India’s crude oil requirements
- India consumes around 50,00,000 barrels of crude oil every day.
- Of that, it imports approximately 45,00,000 barrels/day making the country the third-largest crude market in the world.
- Every month, on average, 70 loaded VLCC (very large crude carriers ) — accounting for 10 per cent of the global tanker market — bring crude oil to India.
- Approximately 60 per cent of this oil is discharged in and around the Jamnagar area and then carried by pipelines to refineries in Jamnagar, Mathura, Panipat, Bina and Bhatinda.
- And 50 per cent or so is sourced from Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq.
- It is against this background of post-COVID uncertainties and above facts India should consider switching to “just in case” policy mode.
Why should India consider switching to “just in case” policy mode?
We should analyse this by considering two scenarios
- ONGC/OIL are strategically important PSUs.
- Few have questioned the support to these two companies and the importance of harnessing our indigenous oil and gas reserves.
- Until now, this support has been premised on the view that oil supplies are relatively scarce and that prices will trend upwards.
1) Low oil prices scenario
- 1) We now need to ask: What if, “just in case” the oil market is structurally oversupplied and prices fall to such low levels that it makes no commercial sense for ONGC/OIL to expend public resources on “ high risk, high cost” exploration?
- Oil and gas are, after all, tradables and can be purchased on the high seas.
- Should they not, given this possibility, contemplate redefining their core purpose and perhaps pivot away from oil and gas towards clean energy?
2) Choking of supply lines scenario
- Looked at through a different lens but with a “just in case” mindset, the preponderance of crude supplies sourced from countries facing deep political, economic and social tensions raises the question:
- What if these domestic problems choked our access?
- How would we manage the disruption?
- Our decision-makers have worried about supply security for decades.
- But the circumstances created by COVID are new.
- The issue of strategic reserves could, for instance, acquire a different hue.
- We have currently 11 days of reserve cover (5.33 million tonnes) with plans to increase it to 24 days (11.83 million tonnes).
- Were we to decide to build up these reserves to levels comparable to other countries of between 70 to 100 days of import cover, the issue would be capital.
- Given the slowdown of the economy and the pressures on the exchequer, the government would not have the financial resources to invest in the creation of additional facilities.
- The only way this financial hurdle could be overcome is if the government and the private sector invest jointly.
- This collaborative option would have to be considered to counter the “just in case” contingency of prolonged and major disruption.
- And if indeed such an option were acceptable, it could be extended to cover trading, crude purchases, co-freighting, subject of course to anti-trust and competition rules.
Consider the example to understand the importance of “just in case” thinking
- An example to embed the importance of “just in case” thinking can be drawn from the geopolitics of our neighbourhood.
- What if the relations between India/Pakistan/China took an ugly turn?
- What security measures should we contemplate to protect the petroleum assets located in Mumbai and Jamnagar?
Consider the question “Over the decades, India has been grappling with the issue of energy security. With the rising uncertainties around the world, the issue has gained more prominence. In light of this, suggest the ways to tide over the disruption in oil supplies.”
Conclusion
In the backdrop of COVID, when all hands on decks are needed to tackle the “urgent” task of reviving the economy, the government must not, in the process, lose sight of the “importance” of creating, if nothing else, the mindset of preparedness to respond to “just in case outcomes”.
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Sharp fall in oil prices is opportunity for India to increase stockpile
Note4Students
From UPSC perspective, the following things are important :
Prelims level: SPR
Mains level: Paper 3- Importance of SPR , issues with it and need for the diversification.
This article highlights the opportunity that the sharp drop in the oil prices presents to India. It also highlights several issues with India’s strategic petroleum reserves and suggests ways to deal with them. We have covered an article from livemint on the same topic in the past week.
Negative price in the international market for WTI crude oil
- Oil prices continue to decline globally, with crude hitting multi-decade lows, as global demand evaporates.
- Earlier last week, in unprecedented price action, the near-month contract for West Texas Intermediate (WTI) sweet crude oil dropped to -$37.63 a bbl.
- A negative price has never before been registered for a major global crude oil benchmark.
- The extreme price action is a signal that there is a global oil glut with few places to store oil.
- Global oil markets have been severely disrupted.
- While WTI does not feature in India’s basket, Brent Crude Oil, which does, is trading around $25 a barrel, the lowest in 18 years.
Price of oil: The silver lining of the future recovery
- Even as India suffers from a lockdown, a silver lining for future recovery and reconstruction is the price of oil.
- Given India’s growth aspirations and lack of self-sustaining oil production, a sharp reduction in oil prices is a bonanza.
- Normally, reduced oil prices would translate into surplus for the consumers and a fiscal bonus for the government through increased tax collections.
- However, given that the demand for petrol has slumped, those gains will not accrue right away.
- Opportunity for India: India should look at this as an opportunity to strengthen its energy security by buying oil and filling up our Strategic Petroleum Reserves (SPR).
- Considering that India was the third-largest consumer of energy in the world, as well as the third-largest importer of oil in 2018, we are particularly vulnerable to oil price fluctuations.
- The dramatic reduction in oil prices offers a once-in-a-generation opportunity for us to fill up our reserves in an extremely cost-effective way.
India’s Strategic Petroleum Reserve (SPR) Programme
- Currently, we do maintain an emergency stockpile of oil reserves: Under the existing Strategic Petroleum Reserves programme, India claims to have 87 days of reserves.
- Out of this, refiners maintain 65 days of oil storage and the rest of the reserves are held in underground salt caverns maintained by Indian Strategic Petroleum Reserves Limited (ISPRL).
- The existing and planned capacity for the underground reserves is 10 and 12 days of import cover for crude oil respectively.
Following point highlights the importance and various issues with India’s Strategic Petroleum Reserves (SPR). SPR plays an important role in India’s energy security. A question based on its role may be asked by the USPC “Assess the importance of Strategic Petroleum Reserves for India and what are the issues associated with that need to be improved?”
Issues with the strategic reserves
- First, capacity does not directly translate into utilisation, which is partly because oil is an expensive commodity most days of the year.
- In 2019, the average closing price of a barrel of crude was $57.05.
- In 2018, it was $64.90, and in 2017, U$50.84.
- Of the existing 10 days of capacity, only about 50 per cent is utilised.
- The second issue is with regard to the refinery holdings.
- In India, the SPR arrangement between the oil refineries and the Union or state governments is not specified well, though most of the refineries that hold stock are publicly-owned companies.
- In fact, a breakdown of which refineries hold SPR and in what form (crude or refined) or information about where they are located is not publicly available.
Need for transparency in relation to SPR
- The first step, therefore, should be to introduce transparency and accountability in relation to the SPR.
- The procedures, protocols and facts about Indian SPR storage require greater public and parliamentary scrutiny, just like India’s other strategic reserves (for instance, foreign exchange).
- For this, there should be timely and reliable dissemination of information.
- Instead, it is now shrouded in secrecy.
- The ambiguity surrounding mobilisation process: The lack of transparency around our SPR holdings is compounded by the ambiguity surrounding the mobilisation process.
- SPR reserves are meant to be used in emergencies, where time is likely to be of the essence.
- The SPR mobilisation process could be made more efficient by laying out designated roles for different agencies to avoid redundancies in times of crisis.
- There should be role and process clarity regarding SPR mobilisation.
- For instance, to begin with, there should be clarity on who (or which agency) can define an emergency and therefore order a mobilisation.
Diversification of SPR
- Further, in order to mitigate risks better, India should look to diversify its SPR holdings.
- Diversification can be 1)Based on geographical location (storing oil either domestically or abroad), storage location (underground or overground) and 2) Product type (oil can be held in either crude or refined form).
- Storage and transportation costs could be saved by diversifying geographically.
- 3) Diversification could also be in the form of ownership — either publicly owned through ISPRL or by private oil companies, such as ADNOC of Abu Dhabi.
- The private companies could fill up the SPR when prices are low and take advantage of price arbitrage.
- This could achieve a degree of price stability and reduce the cost for India to buy such large quantities of oil.
- The only requirement for this to work is to have a clear contract with the private companies about the mandatory minimum level of stock that they should preserve for use in emergency times.
Storing oil abroad
- With oil dirt-cheap, if we can purchase more than we can store in our existing facilities, why not go abroad for more storage space?
- For instance, one option could be to operationalise, modernise, and add to the oil tanking facilities at Trincomalee in Sri Lanka.
- Another opportunity would be to enter into a strategic partnership with Oman (Ras Markaz) for oil storage.
- Partnership with Oman would also help India avoid the potential bottleneck of the straits of Hormuz.
- Geopolitical risk factor: Since many of these places could potentially be vulnerable to geopolitical risks, only a small part of India’s overall SPR strategy should involve storing abroad.
Conclusion
Energy is and will remain vital to India’s aspirations for growth. The sharp fall in the price of oil presents an opportunity for the Union government to increase its SPR stockpile and achieve a degree of energy security.
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Don’t waste the oil crisis
Note4Students
From UPSC perspective, the following things are important :
Prelims level: WTO benchmark, Brent crude.
Mains level: Paper 3- What are the implications of oil price fluctuations for Indian economy?
This article discusses the factors that contributed to oil prices falling below zero, and where the prices are headed in the near future. There are suggestions for India to make the most of this oil crisis. In the last week, we covered the same topic but its focus was on increasing the storage capacity. This article also covers the geopolitical implications of oil prices remaining low for long.
What negative price of the benchmark US crude WTI mean?
- The collapse in the price of WTI reflected a technical peculiarity of futures trading.
- Paper traders would normally have had two options- 1) To let their contract expire and take physical delivery 2) To pass on the contract to someone else.
- The US was running out of crude oil storage capacity and traders knew they could not “risk” taking delivery.
- There was no physical space to hold the product.
- So their only option was to sell the contract.
- On the last day before the contracts expired, the traders in desperation “paid” to offload their risk.
- There was no physical transaction of oil.
- The current future price is back in positive territory.
The world running out of oil storage capacity
- The world and not just the US was fast running out of storage capacity.
- Production in excess of demand: This was because oil production was way in excess of demand.
- The latter had crashed by almost 30 million barrels a day or mbd (the equivalent of OPEC’s entire production) because of the COVID-induced lockdown of transportation and industry.
- The price of the other crude benchmarks had also dropped but not the same extent — the North Sea Brent fell, for instance, to $15/bbl, a level not seen since 1999.
- The reason was that unlike the WTI, which is traded in the US and therefore dependent on US inland storage capacity, the other crudes have access to seaborne storage (oil tankers).
- This latter capacity is, however, fast filling up and the price of these crudes may also hit historic lows.
So, where the oil prices are headed?
- Oil prices will be volatile downwards until demand picks up and/or supply is further cut.
- Demand will depend on the curve of post-COVID economic recovery.
- Supply will rest on the outcome of further discussions amongst OPEC, Russia and, ironically, the US.
- OPEC and Russia had earlier this month agreed to cut production by 10 mbd.
- But clearly, this is not enough and further cutbacks have to be agreed on.
- Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64) over the next 12 months or so.
- More likely, they will be volatile downwards with $50 as the ceiling and with no floor.
- This “low for longer” price outlook raises two issues for India’s policy-makers.
As India depends on imports for over 80% of its oil requirements, oil prices have wide implications for the financial health of India. Safe oil supply lines are essential for its energy security. Both these points are important from the UPSC point of view. Following two points deal with these two factors.
Two issues that India’s policy-makers need to consider-
1. Disruption of oil supply lines and problems of diaspora
- Every oil producer with no exception will face a budgetary crisis.
- Some, like Saudi Arabia, the UAE and Kuwait will finance their social and economic commitments by cutting costs, increasing debt and drawing down on their sovereign reserves.
- Others like Iran, Iraq, Nigeria and Venezuela, who have no such cushion and whose credit ratings are junk, will confront deepening political and social crises.
- Economic plan: India should build into its economic plans the possibility that its traditional oil supply routes could get disrupted.
- And that its diaspora, whose remittances are of significance, could face disproportionate hardship as these economies retrench.
India has the largest diaspora in the world and sends as much as $80 billion back home as remittances. So, any impact on diaspora in oil economies has implication for India from this perspective as well.
2. Empower the oil traders and remove bureaucratic control
- On the day prices hit negative territory, it is unclear whether the trading experts in our oil PSUs had the flexibility to even contemplate “buying” the WTI futures contract for June, taking delivery, shipping it to India and storing it someplace.
- It is also not clear whether they had the authority to lock in low prices through forward contracts.
- Storage capacity and WTI quality mismatch: There is a shortage of storage capacity in India and a mismatch between the quality of WTI and the requirements of our refineries.
- India cannot leverage the current market conditions of low and volatile oil prices to our national advantage unless we empower the traders and leave them unencumbered from bureaucratic control.
- Most importantly, protect them from the three Cs ( CVC, CBI and CAG) in case their trade goes awry.
Conclusion
This oil market crisis could be made to work to our advantage. We must not waste this opportunity. There is a need to remove the bureaucratic hurdles in our PSUs, increasing storage capacity and sound financial planning by the government to make the most of this oil crisis.
Back2Basics: What is WTI and Brent crude benchmark?
- West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
- This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.
Brent Crude
- Brent Crude is a trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
- This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.
Futures contract
- In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
- The asset transacted is usually a commodity or financial instrument.
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Let’s make the most of dirt-cheap oil
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Strategic Petroleum Reserves.
Mains level: Paper 3-How India can make the most of cheap oil prices?
For the first time in history, oil prices hovered in the negative territory recently. This article discusses how this opportunity can be utilised by India in various ways.
Oil selling for negative price
- In a dramatic and unprecedented turn of events on Monday, crude oil began trading in negative territory for the first time since records began.
- The price on a futures contract for West Texas crude that was due to expire on 21 April crashed to minus $37.63 a barrel.
- Covid effect: This is a direct result of the market mayhem caused by covid-19, which has resulted in lockdowns around the world, brought economies to a screeching halt, and crushed demand for transport fuel.
- No space to store oil: Reports say there is so much unused oil in the US that there is no space left to store fresh supplies.
- Storage costs money. Thus, oil producers had to pay to offload their stock.
How did we get here?
- Thanks to the covid-19 pandemic, multiple demand and supply shocks are wrecking economies across the globe and bringing economic activity to a standstill.
- Assembly lines have halted, supply chains have snapped, commodity prices have fallen, the services sector has ground to a halt, financial markets are in a panic.
- And the Great Lockdown has depressed various other economic variables and pushed the world into a deep recession.
- Tensions among suppliers: The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers.
- Relatively high prices over 2019 had allowed non-traditional players like US shale oil companies to thrive.
- Meanwhile, Saudi Arabia and Russia, the most influential members of OPEC+, the Organization of Petroleum Exporting Countries that have allied with Russia on and off since 2016, had been in competition to expand their market share.
- A flashpoint arose in early March, when Moscow refused to agree to OPEC’s desired production cuts to keep prices stable.
- This prompted a price war with Riyadh, as both attempted to increase market share or put other competitors (particularly US shale) out of business.
- Though a production cut has since been agreed to between Russia and Saudi Arabia, demand is estimated to have fallen far more than that.
- Contracts for late 2020 are still going for only around $30 per barrel.
- As a result, producers such as Kuwait, Oman, Nigeria, and Venezuela will continue to feel the strain.
How can India maximise potential gains?
- India imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity.
- Under normal circumstances, such a drastic fall in oil prices would have a big positive effect on the finances of the Union government and the economy in general.
- The current circumstances, however, are anything but normal.
- So, India must use this low price opportunity in the following ways.
The strategic petroleum reserves (SPRs) assumes significance in India’s energy security whenever tension rises in the region from which we import our oil. Take note of the suggestion with respect to SPRs.
Fill up the strategic petroleum reserves (SPRs)
- The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs).
- Like other large consumers, India holds oil inventories for the sake of energy security during a supply cut-off or some other emergency.
- How much are our SPRs? Our SPRs are estimated at five days’ worth of oil imports, stored in underground salt caverns, and a further 65 days’ worth held by commercial refineries.
- Current prices provide a perfect opportunity to bolster these reserves in preparation for future shocks.
- The government-owned agency, Indian Strategic Petroleum Reserves Limited (ISPRL), should now be focused on filling up and utilizing the existing capacity of the country’s underground caverns.
- In fact, it should be hardwired to consider filling these up each time the price of Brent crude falls below $40.
- Separately, in the second phase of India’s SPR plans should be fast-tracked.
- Working with private players: This involves working with private players to design, build, finance, operate, and transfer underground oil tanks.
Negotiate long term contracts at current prices
- Commercial refineries, many of which are public-sector enterprises, should strike and renegotiate long-term contracts with suppliers based on current prices.
- Other firms reliant on oil and subject to the vagaries of oil prices, such as airline companies, should also do likewise.
Geographically diversify the SPR holdings
- This is also an opportune time for the Indian government to geographically diversify its SPR holdings.
- To lower transport and storage costs, and to diversify risk, Oman or Fujairah in the UAE could be contracted to hold a quantity of oil on India’s behalf.
- These reserves can be shipped to India when needed.
- India should also operationalize, modernize and add to its oil tank facilities in Trincomalee, Sri Lanka, which is partially owned by India.
Conclusion
The global energy landscape is likely to remain volatile in the near future and oil is likely to remain an important part of India’s energy needs. This is a good time to enhance the country’s energy security.
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What explains crude oil prices falling below the $0 mark?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: West Texas Intermediate (WTI), Brent Crude
Mains level: Global crude oil pricing dynamics and its impact on India
Context
- Recently US oil markets created history when prices of West Texas Intermediate (WTI), the best quality of crude oil in the world, fell to “minus” $40.32 a barrel in New York.
- Not only is this the lowest crude oil price ever known the previous lowest was immediately after World War II — but also well below the zero-mark.
- At this price, the seller would be paying the buyer of crude oil $40 for each barrel that is bought.
Crude oil price dynamics are undergoing dramatic changes this year. The ongoing pandemic has worsened the situation further. India has ample opportunities to get benefited from the ongoing situation.
But how can that be? How did prices fall below zero in the first place? Let us see:
Global fall in crude oil prices
- The first thing to understand is that, even before the Covid-19 induced global lockdown, crude oil prices had been falling over the past few months.
- The reason was straightforward. The price of a commodity falls when supply is more than demand.
- The global oil pricing is by no stretch an example of a well-functioning competitive market. In fact, it’s seamless operations crucially depend on oil exporters acting in consort.
OPEC+ failure (earlier)
- Historically, the OPEC, lead by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand), used to work as a cartel and fix prices in a favourable band.
- It could bring down prices by increasing oil production and raise prices by cutting production.
- In the recent past, the OPEC has been working with Russia, as OPEC+, to fix the global prices and supply.
- This happy accord came to an end as Saudi Arabia and Russia disagreed over the production cuts required to keep prices stable.
- As a result, OPEC undercutting each other on price while continuing to produce the same quantities of oil.
What it costs to a country for cutting production
- The production cut was made worse with the growing spread of Coronavirus, which, in turn, was sharply reducing economic activity and the demand for oil.
- It must be understood that cutting production or completely shutting down an oil well is a difficult decision because restarting it is both costly and cumbersome.
- Moreover, if one country cuts production, it risks losing market share if others do not follow suit.
Demand-supply mismatch got worse
- By the time the Saudi Arabia and Russia discord was sorted out last week, under pressure from US President, it was possibly too late.
- Oil-exporting countries decided to cut production by 6 million barrels a day — the highest production cuts — and yet the demand for oil was shrinking by 9 to 10 million barrels a day.
- This meant that the supply-demand mismatch continued to worsen right through March and April.
- According to reports, all possible the mismatch resulted in almost all storage capacity being exhausted.
What led to negative oil prices: Immediate causes
- The contracts fir this month for WTI, the American crude oil variant, was due to expire. As the deadline came near, prices started plummeting. This was for two broad reasons.
- There were many oil producers who wanted to get rid of their oil even at unbelievably low prices instead of choosing the other option shutting production.
- The space to store the oil too got exhausted. Trains and ships, which were typically used to transport oil, too, were used up just for storing oil.
- They figured that it would be more costly for them to accept the oil delivery, pay for its transportation and then pay for storing it, especially when there is no storage available than to simply take a hit on the contract price.
Future prospects
- It is important to note that it was the WTI price for May in the US markets that went so low.
- Crude Oil prices elsewhere fell but by not so much. Moreover, at least for now, oil prices are pegged at around $20 a barrel.
- It is likely that this was a one-off event and will not happen as producers are forced to cut back production further.
- But one cannot rule out such a repeat, with COVID-19 continuing to spread, demand is falling every day.
- In the end, it would be the demand-supply mismatch (adjusted for how much can be stored away) that will decide the fate of oil prices.
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OPEC+ decides combine slashing of crude oil production
Note4Students
From UPSC perspective, the following things are important :
Prelims level: OPEC+
Mains level: Global crude oil pricing dynamics and its impact on India
India has made a case for affordable oil prices in the backdrop of the Organization of the Petroleum Exporting Countries-plus (OPEC+) combine slashing production amid the COVID-19 pandemic.
Global crude oil pricing dynamics greatly impact India and its import bill. Kindly refer to the article titled “Oil Prices and OPEC+” pinned below this newscard. Various aspects related to the issue are covered in the Burning Issue section . It seeks to answer all your doubts such as ; Impact on Fuel prices, India’s forex reserves, Strategic petroleum reserves, etc.
Why a cause of worry?
- OPEC accounts for around 40% of global production.
- The OPEC accounts for 80% of India’s crude oil imports.
- Any production cut by the OPEC plus arrangement impacts India’s energy security efforts in the short run.
Impact on India
- India, which is one of the major OPEC consumers, has always stood for a global consensus on responsible pricing.
- Indian refiners have cut production as the lockdown has led to a sharp decline in demand for transportation fuels.
- Demand for domestic cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the coronavirus.
About OPEC+
- The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
- Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Back2Basics: OPEC
- OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
- It is headquartered in Vienna, Austria.
- OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
- Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.
Also read:
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Oil in a post-Covid world
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Oil war in international oil market and implications for India.
Context
In the post-COVID world, India will, once again, confront the challenge of oil and gas supply security. We should, therefore, ask: What will be the landscape of the petroleum sector, post-COVID? And what should India do now to prepare for an uncertain and contingent energy future?
Oil war and the death knell of OPEC
- The concept of MAD (Mutually Assured Destruction) deterred the nuclear powers during the Cold War. It has had no such effect on the oil powers.
- Implications of the decision of Saudi Arabia and Russia: At a time when the virus had pushed the global economy into recession, Russia and Saudi Arabia took a set of decisions last month that knocked the economic props from under the oil market.
- What were the reasons behind the decisions: The Saudis decided to flood the market to hold onto market share and the Russians accepted the consequent decline in prices to push the US shale industry to the wall.
- Future of OPEC: Both may achieve their objectives but they have sounded the death knell of OPEC and possibly that of the oil industry as well.
Two reasons for the decline in the oil prices
- Today, the price of oil, at just above $30/bbl , is at its lowest in a decade, and volatile downwards. The average price in 2019 was $64/bbl.
- The reason is two-fold.
- One, the Saudis have ramped up production from 9.8mbd (before the March meeting) to in excess of 12 mbd today.
- Two, there has been an unprecedented COVID-induced crash in demand. This is because of the lockdown of the two main drivers of oil consumption — transportation and industry.
- It is estimated that oil consumption in the current quarter will fall by approximately 25 mbd.
- This is almost as much as OPEC’s production.
- The Saudis and Russia may still come to an understanding that rallies the price.
- There will be three major implications for the oil-producing countries.
1. Budgetary crisis
- Every major oil-exporting country will face a budgetary crisis.
- Qatar has the most robust balance sheet of all OPEC members. But it still needs an oil price of around $40/bbl to balance its books.
- Algeria has the weakest. It needs an excess of $100/bbl.
- Saudi Arabia is at the Algerian end of the spectrum requiring a price of around $80/bbl.
- Abundant foreign reserves: This does not mean these countries are about to go financially belly up. Most of them, the Gulf producers, in particular, have abundant sovereign reserves.
- But what it does mean is they will be hard-pressed to sustain their social and economic commitments.
- They will have to cut back on subsidies, raise taxes and the citizens will be required to tighten their belts.
- What India should do? India should build into its oil supply plans with the likelihood of civil strife in these countries.
2. Reconfiguration of the oil industry will take place
- Already, at current prices, a large number of companies are finding it difficult to cover their cash costs and have been forced to cut production and shutter operations.
- At even lower prices, they will become bankrupt.
- Whatever the final outcome, one fact is clear. Those that survive the carnage will have substantially slimmed balance sheets and reduced valuations.
- Exxon’s market capitalisation has, for instance, halved over the past month.
- Implication for India: Against this backdrop, we should drop the expectation of international interest in BPCL. Or for that matter ME investment into India.
- Ratnagiri refinery: The $40-billion Ratnagiri refinery project by Saudi Aramco and UAE will certainly not see the light of day.
- We should also expect a drop in the intensity of domestic exploration.
3. Behavioural changes and uncertainties
- The world, post-COVID will be different from the world pre-COVID. Behaviours will shift and these will deepen uncertainties.
- “Social distancing” may change the dynamics of “shared mobility”.
- Teleporting may reduce business travel.
- Heightened awareness of the porosity of national boundaries may accelerate the push towards decarbonisation? These uncertainties will push the petroleum market deeper into no man’s land.
Way forward for India
- Whatever be the shape of the post- COVID international petroleum market, India will be dependent on it to secure its domestic energy requirement. The question should, therefore, be asked. What should the decision-makers do today to respond to such a contingent and uncertain future?
- 1. Increase the strategic reserves: It should fill the oil caverns with strategic reserves. Prices may fall further but rather than bottom fish, it should leverage the availability of capacity to secure discounted supplies.
- The world has run out of storage capacity and producers may pay premium dollar to find space for their unsold cargoes.
- 2. Reduce the dependency and risk: India should increase its imports of gas (LNG ) from Australia, Africa and the US.
- This will reduce the political risks of dependency on oil supplies from the Middle East.
- Gas is also now economically competitive. The landed price of LNG is low enough to kick-start some of the stranded gas-based power plants.
- 3. Increase operational efficiency of oil companies: It should unthread the “patchwork quilt of authority” exercised by bureaucrats, regulators and politicians, which today stifles management and operational efficiency of the petroleum companies.
- 4. Integrated energy policy: India should create an institutional basis for an integrated energy policy. If there is one message we must internalise from COVID, it is the importance of collaboration and coordination.
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The battle to set oil prices
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Factors contributing to the drop in oil prices and implications for India.
Context
The global economy, grappling with the COVID-19 pandemic, is now facing an energy war, with crude oil prices crashing in the international market.
Developments that contributed to the fall in oil prices
- First, Crude oil prices tanked, as the Organisation of the Petroleum Exporting Countries (OPEC) and its alliance partners failed to reach any consensus on cutting back production to levels that would enable prices to remain stable.
- Second, the U.S., as the largest oil producer today, has stayed away from the OPEC-plus arrangement, hoping that production cuts by OPEC-plus countries will help it increase its market share.
- Russia refused any production cuts, unleashing an energy war with Saudi Arabia. There has been a spectacular fall of around 30% in crude oil prices.
- The International Energy Agency (IEA) has scaled down global demand for oil, a move not taken by the energy watchdog since 2009.
- COVID-19 Factor: Demand for oil had already weakened owing to the global economic slowdown, and this weakening has become more pronounced due to the COVID-19 pandemic, which has hit China’s economy and reduced consumption by the world’s largest importer.
The US-Russia oil war
- Denying market share to the US oil producer: Russia’s decision to reject any production cuts is driven directly by its strategy of denying market share to American shale oil producers.
- Shale oil companies can sustain in high prices only: The American shale oil producers rely on higher prices in the range of $50-$60 to remain profitable because of higher production costs.
- At $31 per barrel, not more than five American shale oil producers can remain profitable.
- Sanctions on Rosneft: Russia also remains resentful of sanctions imposed on Rosneft, which is building the gas pipeline project Nord Stream 2 across the Baltic Sea, carrying Siberian gas to Germany, a major consumer.
- Delay in completion of the pipeline: This pipeline was delayed due to opposition from Denmark’s environmental activists and could not be completed before the U.S. sanctions kicked in.
- Moscow has accused Washington of using geopolitical tools for commercial reasons.
- The energy war over prices is Russia’s revenge, to cripple the American shale oil industry.
- Russia’s signal to Saudi Arabia: Russia is also signalling to Saudi Arabia that its American patrons can do little to protect its oil interests and it would be prudent for Saudi Arabia to reach some understanding with Russia.
- Both Saudi Arabia and Russia depend heavily on oil revenues — upwards of 80% of export revenues accrue from crude oil.
- Russia and Saudi Arabia fighting for market share: Both are also fighting to retain market share.
- Impact on India: It has been reported that Saudi Arabia has agreed to supply crude oil at lower rates to refiners in India and China, two primary customers, but refused to supply to other refiners in Asia. This will have an impact on India’s oil procurement from the U.S.
The benefits to importing countries
- Why the price drop matters to India? Lower crude oil prices are not necessarily bad news for oil importing countries like India, which is the world’s third-largest importer of crude oil and the fourth largest importer of LNG.
- Collateral adverse consequences: There are, however, collateral adverse consequences like the battering of the stock markets worldwide.
- Impact on the global economy: The global economy, already impacted by President Donald Trump’s trade war with China and other countries, including India, and the COVID-19 pandemic, may find lower energy costs helpful in overall growth.
Benefits for India
- From a high of $147 per barrel in 2008, crude oil prices have fallen to around $24 per barrel and may even go further southwards.
- How much the price drop matter for India? India, with 80% of its energy requirements met by imports from the international market, stands to save ₹10,700 crores for every $1 drop in prices.
- Non-oil related factors: While this may help manage the current account deficit, fiscal deficit and inflation, there are non-oil related collateral factors that can cause countervailing adverse economic impact.
How long Russian and Saudi Arabia can sustain the war?
- Can Russia and Saudi Arabia sustain the energy war for long?
- Saudi Arabia’s production cost is the cheapest in the world and it can ramp up production to around 12 million barrels a day.
- By offering discounts, it can undercut other producers, including Russia.
- Domestic considerations also matter.
Conclusion
There is no doubt that India will benefit from lower oil prices if the cost of fuel at the pump is passed on to consumers. It will reduce transportation costs and boost demand. The consumer, however, may not benefit much since the government may choose to use this financial windfall for other purposes, like bailing out banks which have been hollowed out by NPAs to leading Indian companies.
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Impacts of the Oil Price War
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Pricing mechanism of fuels in India.
Mains level: Paper 3- Implications of oil-price war for India.
Context
A “pass-through effect” of low crude prices is improbable given the constrained fiscal space.
The backdrop to the oil price war
- Against the backdrop of the covid-19 pandemic and the economic slowdown, Saudi Arabia-led oil cartel OPEC (Organization of the Petroleum Exporting Countries) wanted to curtail oil production by 1.5 million barrels per day.
- However, as Russia has not agreed to this proposal, Saudi Arabia has declared a price war by reducing the Brent crude oil price from $65 per barrel in end-December 2019 to $33 now.
- The race to the bottom to this extent by Brent is the first time ever since the 1991 Gulf crisis.
Would it impact India by providing a fiscal dividend?
- A $20 reduction in Brent oil prices can reduce India’s current account deficit.
- However, the instability in oil prices is a short-run phenomenon, and India cannot anticipate a prolonged fiscal dividend.
- Quite contrary to the expectations about a “pass-through effect” of low crude oil prices on consumers, the Government of India (GoI) raised the excise duty on petrol and diesel by `3 per litre.
- The special excise duty on petrol was hiked by 2 to 8 per litre in the case of petrol and to 4 in the case of diesel.
Fuel price determination in India
- There has been no “pass-through effect” primarily because the price determination of petrol and diesel in India is not linked to crude oil prices in the international market.
- Price determination is done through dynamic pricing, termed as “trade parity pricing,” based on the international prices of petrol and diesel (finished products) prevailing in the international markets, and not on crude oil per se.
- An obvious question here is whether the crude oil prices and the petrol-diesel prices move in tandem in the international market. Not always.
- Globally, the market mechanism of ad hoc configurations of demand and supply of crude oil is different from the demand-supply dynamics of petrol and diesel, and, in turn, their pricing behaviour will also be distinctly different.
- The goi fixes the price of petrol and diesel based on dynamic pricing and trade parity pricing by converting the price from dollars to Indian rupees.
Factors affecting fuel prices in India
- The rupee-dollar exchange rate mechanism also affects the pricing of petrol and diesel.
- This can offset the benefits India can reap from comparatively lower prices of crude oil in the international market, quoted in dollars.
- The other components of this pricing formula are: 1.The cost of inland freight marketing costs. 2. Taxes levied by the centre and the state governments. 3. The margins (charged by the oil companies) and (the dealer) commissions.
- It is, therefore, obvious that low international prices per se do not translate into lower prices for petrol and diesel in India as long as the centre and states levy exorbitant taxes on these products.
- The interstate variation in the prices of petrol and diesel is also significantly explained by the differentials in taxes imposed.
- Yet another factor to be borne in our minds is that the effect of international prices on the in-house pricing of petrol and diesel in India is not instantaneous or spontaneous.
- There is a time lag involved in the pricing process.
- Even though the goi uses the daily pricing mechanism in the dynamic pricing formula of petrol and diesel, the international prices component enters into the pricing equation as an international “benchmark price” of petrol and diesel.
- Today’s price in India reflects the average international prices of petrol and diesel of the previous fortnight.
- However, the fuel prices will not come down in a fortnight’s time.
- This is because, in the price equation, the international price component is just one among many components, whereas the tax component constitutes a dominant part in the equation.
The Covid-19 factor
- The covid-19 outbreak has started striking the financial markets and the real sector, and especially investment in the energy sector.
- So, the lowering of the oil price by Brent cannot help the global economy from recession.
- Overall, the oil price war can negatively affect the investment decisions in the energy sector and can be a drag on global growth.
- Due to the covid-19 outbreak, there could be reduced oil-drilling activities in the energy sector, and there will be some cutbacks in demand and, in turn, in the capex energy infrastructure.
- Analysts have revealed that every $10 fall in oil prices transfers around 0.3% of the global gross domestic product from oil-producing nations to oil-consuming nations.
- The interest rate strategists are also concerned as the Russian 10-year bond yields reached a record low of 2.56%, and Saudi Arabian government bonds maturing in April 2030 are currently at 2.38%.
Microeconomic policy to tackle oil price war?
- The US Federal Reserve has lowered the federal funds’ interest rate by 50 basis points (one-half of a percentage point) to 1.25%.
- The Bank of Canada also reduced the bank rate by 50 basis points to the US level. The stock market indexes fell to the levels of 2008.
- The 1.25% federal funds rate now is below the 2.5% US inflation rate. However, monetary policy has failed to trigger the economy.
- As mentioned by the European Central Bank, “targeting” rather than generalised public policy needs to be done.
Conclusion
- The Reserve Bank of India policy tools may be ineffective now to tackle the slowdown, especially against the backdrop of the worsening of the economy from the effects of covid-19. The re-dominance of fiscal policy by the North Block is what is keenly awaited, for an economic turnaround.
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Govt. has raised excise duty cap on fuel
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Excise duty
Mains level: Crude oil pricing dynamics
In a move which would help the government to raise excise duty on fuel further in future, the government has raised the cap on special additional excise duty on petrol and diesel. These changes are as per the amendments in the Finance Bill passed in the Parliament.
Why such move?
- Government is increasing duties on petrol and diesel to raise revenues in view of a tight fiscal situation.
- Slump in global crude oil prices, alongside possibility of a global economic recession, has forced the government to look for avenues to raise revenues to support growth.
- With major companies going for production shut downs, industry players have suggested the government to boost fiscal stimulus in the wake of demand collapse triggered by the coronavirus.
- Earlier, Saudi Arabia had triggered the crash in prices by announcing a sharp increase in oil production after Russia declined to reduce oil supply to contain a fall in oil prices due to declining demand in a meeting of petroleum exporting countries.
Impact of the move
- Every rupee hike in excise duty is expected to yield roughly Rs 13,000-14,000 crore annually.
- The slump in global crude oil prices enables the government to raise these duties substantially without immediately putting the burden on the consumer.
- But there is expected to be a demand slowdown for fuels with a nearly country wide lockdown in the wake of coronavirus.
- With airlines, railways, trucks and passenger cars going off the roads, petrol, diesel and ATF (aviation turbine fuel) consumption is expected to fall drastically.
Back2Basics
What is Excise Duty?
- Excise duty is a form of tax imposed on goods for their production, licensing and sale.
- It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
- At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
- Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.
Purview of excise duty
- The GST introduction in July 2017 subsumed many types of excise duty.
- Today, excise duty applies only on petroleum and liquor.
- Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
- States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
- After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.
Types of excise duty in India
Before GST kicked in, there were three kinds of excise duties in India.
Basic Excise Duty
- Basic excise duty is also known as the Central Value Added Tax (CENVAT). This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
- This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.
Additional Excise Duty
- Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
- This duty was levied on some special category of goods.
Special Excise Duty
- This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
- Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.
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How the country should make the most of a second oil windfall
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- How the government should utilise the windfall from fall in the oil prices?
Context
Amid the coronavirus scare came India’s silver lining in the form of a failure of the Organization of the Petroleum Exporting Countries (Opec) and Russia to reach an agreement on oil production cuts.
Reasons for Russia’s decision and its aftermath
- Why Russia declined to sign the agreement: Russia declined to cut its oil supply with an intention to compete with the US shale industry.
- Start of the price war: Consequently, a price war has started as Saudi Arabia plans a big increase in its oil supply. Saudi Arabia, which is the world’s largest oil exporter, has started offering unprecedented discounts in Europe, the Far East and the US to increase its supplies at the cost of other oil producers.
- Immediate fallout: An immediate fallout of the Russia-Opec meeting was a 9% fall in oil prices on Friday. Monday saw a sharper drop.
Supply and demand shocks and implications for India
- The demand shock: The impact of Covid-19 will be felt on the global demand for oil, too, as a dramatic increase in Covid-19 cases has put further downward pressure on demand for commodities, including oil.
- Thus, both supply and demand shocks have coalesced to roil the crude oil market.
- How much was the drop in price: Since the start of the year, oil prices have fallen by about a third.
- Prices may drop further under the weight of the twin assault of higher supply and lower demand.
- It is, therefore, not a stretch to expect oil prices over the coming financial year to be lower than they were in the previous two.
- Implications for India: This has positive implications for India’s economy and policymaking, as it comes at a time when it has embarked on an uncertain and hesitant recovery.
Opportunity for India
- Precarious fiscal situation: The growth slowdown in the last two years has resulted in a precarious fiscal situation because of tax revenue shortfalls.
- Implications of the fiscal constraints: A direct casualty is the ability of the government to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.
- Constraints holding back the government from offering stimulus: Budgetary constraints combined with the Fiscal Responsibility and Budget Management Act have held the government back from fully offsetting a private sector demand slowdown with its own spending.
- Opportunity in the low oil prices: Low oil prices offer an opportunity to raise some revenue and improve its fiscal balance.
Way forward
- First- Passing half the benefit to consumers: As oil prices slide below levels in the previous two years and also below the price of India’s oil basket of $65 per barrel reportedly assumed for 2020-21, there’s an opportunity to pass on about half the benefit of lower global prices to consumers, while the other half can be used to shore up revenue by levying higher excise duty.
- The Union government did something similar between 2014 and 2016.
- Improving the fiscal health: It used low oil prices to improve its fiscal health, as the budget deficit it inherited from the previous government was higher than what the official figures suggested.
- Second-Revenue generated should be used to clear dues: The additional tax revenue thus generated through higher excise duty should be used to clear all dues of the central government, whether to private companies, state governments, or others awaiting tax refunds.
- Putting cash back in the hands of households and small businesses will go a long way in maintaining the growth of domestic demand, besides improving the credibility of the Union government as a trustworthy counter-party.
- Third-Fiscal leeway: The potential excise duty windfall from oil prices could come in handy for the government to provide relief to beleaguered telecom companies.
- The government will have fiscal leeway to allow a staggered and a longer schedule for the payments they have to make, arising out of the Supreme Court ruling on adjusted gross revenues.
- The telecom growth story is an important component of the broader India story, and the sector needs an urgent breather to ensure we are adequately prepared for a 5G roll-out, whenever it happens.
- Fourth-Recalibrate: A slowdown in economic activity, which is inevitable with restrictions placed on mobility and human interaction, will have adverse fiscal implications.
- Tax collections will decline. So will remittances from Indian workers in the Gulf, if that region is buffeted by oil and virus shocks.
- Hence, the quantum of the windfall from lower oil prices will need to be constantly re-assessed and fiscal strategies recalibrated.
- Fifth-Hedging against the higher prices: Even as it should nimbly take advantage of the lower prices now, the government should seriously consider hedging against possible higher oil prices in the medium- to long-term through appropriate instruments available in financial markets. This idea should be extended to hedging against a fall in the rupee relative to the US dollar too.
- Finally-Consider assembling the crack team: It may be worthwhile for the government to consider assembling a crack team of former and current bureaucrats, who have proven their mettle in different crises and in different sectors, to advise it on policy measures that should be adopted in these extraordinary times. Much policy innovation and courage, combined with integrity, will be needed for India to emerge stronger from 2020. For the country’s leadership, there isn’t much to lose from breaking free of old policy and behavioural shackles.
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Why have LPG prices seen a sharp rise?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: LPG, PM Ujjwala Scheme
Mains level: Pricing mechanism of LPG in India
Recently, LPG prices, which are revised on a monthly basis, went up yet again.
What influences LPG prices in India?
- Domestic prices of liquefied petroleum gas (LPG) are based on a formula — the import parity price (IPP), which is based on international LPG prices.
- Saudi Aramco’s LPG price acts as the benchmark for the IPP and includes the free-on-board price, ocean freight, customs duties, port dues and the like.
- This dollar-denominated figure is converted into rupees before local costs — such as local freight, bottling charges, marketing costs, margins for oil marketing firms and dealer commissions and the GST — are added.
- This helps the government arrive at the retail selling price for LPG.
- The government resets the LPG price every month, the decision being influenced by international prices and how the rupee has behaved against the dollar in the immediately preceding weeks.
Who will the price rise affect?
- The price increase will affect retail consumers who have given up the subsidy.
- The government has said that for those who avail subsidy, the increase would be mostly absorbed by the rise in subsidy.
- The Centre said the price of an unsubsidized cylinder would increase from ₹714 to ₹858.50 in Delhi, for example, and that the subsidy offered would go up from ₹153.86 to ₹291.48.
- Of the 27.76 crore retail consumers, 26.12 crore consumers avail LPG subsidy. Likewise, for Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.
Does this help the government move to an open pricing regime?
- Prior to the latest round of the price increase, the government had raised LPG cylinder prices by ₹62, starting from August 2019.
- Compare this with the increase of ₹82 that had taken place over five years to mid-2019, indicating a penchant for increasingly lesser subsidy.
- In the latest round, though, the Centre has sought to absorb much of the increase for those availing subsidy.
- It looks like the most recent increase has been beyond its control and it is hence raising the subsidy levels to protect consumers, given that the economy is reeling from lack of consumer spending.
What is the outlook?
- With international crude prices on the downtrend, it is plausible the LPG prices too would see a slump.
- Aramco has lowered its propane price for February to $505 per metric tonne.
- Assuming we receive no surprises from the rupee-dollar tango, a softening of LPG prices in the domestic context may be expected.
What are the implications for the broader economy?
- At a time when consumer demand, in general, for goods and services in the country has slumped, more cash in the hands of the retail consumer may have helped spur demand.
- It is ironic that the government has had to raise LPG prices now.
- This sucks away even more disposable income from those consumers who pay market rates for LPG. As a result, household budgets are bound to go up, especially for those not availing the subsidy.
- The increase in LPG price could spur headline inflation even further. As it is, the consumer price index inflation has seen a rise over the past few months.
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Natural Gas Grid (NGG)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Natural Gas Grid (NGG)
Mains level: Natural gas: Its uses and limitations
A study to facilitate the development of a National Gas Grid is to be undertaken soon by a U.S. entity. The Government has last year envisaged developing the NGG.
National Gas Grid
- At present about 16,788 Km natural gas pipeline is operational and about 14,239 Km gas pipelines are being developed to increase the availability of natural gas across the country.
- These pipelines have been authorized by Petroleum and Natural Gas Regulatory Board (PNGRB) and are at various stages of execution viz. Pre-Project activities/laying/testing/commissioning etc.
Aims and Objective
- To remove regional imbalance within the country with regard to access of natural gas and provide clean and green fuel throughout the country.
- To connect gas sources to major demand centres and ensure availability of gas to consumers in various sectors.
- Development of City Gas Distribution Networks in various cities for supply of CNG and PNG.
NGG Technical Assistance Program
- The India NGG Technical Assistance programme stems from an agreement in September between PNGRB and the US Trade Development Agency (USTDA).
- The study will aim at developing an economic basis for building India’s Natural Gas Grid (NGG).
Utility of the study
- It would provide an update on the gas demand analysis, including anchor consumers, industries, city gas distribution (CGD) and emerging demand centres such as CNG and LNG for road transport.
- The study will take a fresh look at the gas supply analysis too. This includes review of LNG imports, domestic supply, potential transnational gas pipeline imports and virtual pipelines.
- Share of natural gas in India’s energy basket is 6.2% as against 23.4% globally and is expected to increase.
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[pib] Saksham Campaign
Note4Students
From UPSC perspective, the following things are important :
Prelims level: ‘Saksham’ Campaign
Mains level: Fossil fuels conservation
‘Saksham’ Campaign for fuel conservation has been launched.
‘Saksham’ Campaign
- It is an annual one-month long, people-centric fuel conservation mega campaign of Petroleum Conservation Research Association (PCRA) under the aegis of Ministry of Petroleum and Natural Gas.
- PCRA and Oil & Gas companies carry out various interactive programs during this month-long campaign.
- Activities like ‘Saksham’ Cycle Day, Cyclothons, Workshops for drivers of commercial vehicles, Seminars for housewives/cooks on adopting simple fuel saving measure.
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Recently, Cabinet has approved new Hydrocarbon Exploration and Licensing Policy (HELP), which will replace New Exploration Licensing Policy (NELP), for Oil and Gas exploration, Will that make any change in oil and gas exploration regime? Let’s see this in brief!
Let’s first take an overview of New Exploration Licensing Policy (NELP)
- New Exploration Licensing Policy (NELP) was created in 1997
- To provide an equal platform to both Public and Private sector companies in exploration and production of hydrocarbons
- Directorate General of Hydrocarbons (DGH) was a nodal agency for its implementation
- Between 1998 and 2012, there were 9 rounds of oil and gas block auction (NELP 1 to NELP 9)
- Although 126 discoveries have been made in 41 active blocks, commercial production has commenced only in 3 blocks
- Reasons for the delay vary from inadequate technology to delayed regulatory approvals
- Today, only 2 blocks, the Reliance Industries-operated KG D6 block and the Gujarat State Petroleum Corporation-operated Cambay onshore block, are producing oil or gas
<Let’s Move towards new version of Policy>
What are the Main facets of HELP policy?
- Uniform License for exploration and production of all forms of hydrocarbon
- Open acreage policy
- Easy to administer Revenue sharing model
- Marketing and pricing freedom for the crude oil and natural gas produced
What is Unified Licensing Policy?
- As the name suggests, all licenses are unified i.e. this allows exploration and production of all hydrocarbons such as oil, gas, coal bed methane and shale oil and gas in a block
- Contrast this with NELP, which required separate licensing for different types of hydrocarbons time and cost overruns
Concept of Open Acreage Policy
- Contractors will now have the flexibility to request bidding for any block on-tap under Open Acreage Licensing
- Earlier, they had to wait for the government to auction blocks, and could only bid for blocks that were put up for auction
- This will enable Exploration & Production (E&P) companies choose the blocks from the area they like
What’s new in Revenue-sharing formula?
- Present system is that of of production sharing based on Investment Multiple and cost recovery/ production linked payment
- Under the new revenue-sharing formula, contractors will share the revenue from the time first drop of oil/gas starts flowing from the field.
How this policy of revenue sharing is in tune with Ease of Doing Business?
- Earlier, under the Production/profit Sharing Methodology, it became necessary for the Govt to scrutinize cost details of private participants and this led to many delays and disputes<as govt was given its share only after all the costs were recovered, govt had to make sure that private parties do not inflate cost to reduce govt’s share>
- To prevent loss of government revenue, there were requirements for Government approval at various stages to prevent the contractor from exaggerating the cost
- Activities could not be commenced till the approval was given. This process became a major source of delays and disputes
- Under the new regime, the Govt will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc.
- So, no CAG audit, no approvals required, no micromanagement by govt.
- Companies would worry less about the govt and focus more on operations
| Parameter | Production sharing Contract | Revenue Sharing Contract |
| Risk | Investor can take higher risk as he will be able to recover investment before sharing with govt | Won’t take higher risk, has to share revenues from the first drop of oil |
| Govt interference | Higher as costs have to be rechecked | minimal |
| Useful for | High risk high cost environment such as deep fields | Low cost environment, fully explored blocks |
| Recommended by | Kelkar Committee | Rangrajan Committee |
| Govt policy | NELP | HELP |
India remains one of the least explored countries and could hold large potential resources. For example, 15 basins out of a total 26 sedimentary basins in India spread over on-land, offshore and deepwater, are estimated to hold prognosticated hydrocarbon resources of over 200 billion barrels of oil equivalent. Hence some recommend Production sharing contracts for India with investing capacity to manage such contracts better.
Graded system of royalty to boost investment
- The current policy regime, in fixing royalties, does not distinguish between shallow water fields (lower costs and risks) and deep/ultra-deep water fields(much higher costs and risks)
- Under the new policy, there is lower royalty rates for difficult areas compared to NELP royalty rates
- A graded system of royalty rates have been introduced, in which royalty rates decreases from shallow water to deepwater and ultra-deep water
- Royalty rate for onland areas have been kept intact so that revenues to the state governments are not affected
Pricing and Marketing Freedom
At present, natural gas price is determined by taking into account the average of prices in gas-surplus countries such as the US, Canada and Russia, but proposed formula is market-efficient
- New Policy allows pricing freedom to companies with a cap on prices to protect consumer interest
- Gas price will be the lowest of imported fuel price; weighted avg of naphtha, coal and fuel oil; and the price of imported LNG
- Policy also gives marketing freedom
- The new price will apply to undeveloped gas discoveries and not on currently producing fields
So, new price formula combined with lower royalty rates will help in undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure fields. Increased investment and competition will eventually bring down gas prices as well as import dependence of India and lead to the development of a competitive gas market in the country.
From NELP to HELP
| UNIFORM Licensing Policy | One license for E&P of all the hydrocarbons from a block |
| Open acreage system | Licenses on tap |
| Revenue sharing model | Minimal govt interference |
| Marketing and pricing freedom | Sell to whoever you want at market determined prices subject to a ceiling price |
How Contract extension will help to remove further obstacles?
- The grant of extension of production sharing contracts for 28 small, medium sized discovered fields is welcome
- Because, this move will remove uncertainty and help contractors plan their investments in these blocks
- The extension will be for 10 years, both for oil and gas fields or economic life of the field, whichever is earlier
Way forward
- India currently produces around 90 mmscmd (Million Metric Standard Cubic Meter Per Day) of gas, hardly meeting 40 per cent of the needs (imports majority of gas from Qatar)
- Oil and Natural Gas Corp (ONGC), Reliance Industries and Gujarat State Petroleum Corporation(GSPC) will now get freedom to price gas from its idle discoveries in deep sea, ultra deepsea and high-pressure and high-temperature areas
- So, overall we can say that, Govt’s target for O&G seems to be on track, to attract more investments, boost production and take away govt discretion from Oil and Gas Exploration
very usefull. thank you team CD!