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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