80th Annual General Meeting
February 15-16, 2008

Address by Mr M S Srinivasan, Secretary, Ministry of Petroleum and Natural Gas

Dr Mitra
Dignitaries on the dais
Dear participants

Energy security is the theme for this particular event. Energy security, as we all know, is a hot topic and there are essentially 3-4 elements in that - availability, accessibility and affordability.

Availability on demand, when a country wants energy, it should be available and the country should be able to afford it,, unlike today's situation where more than 40 small economies of the world have priced themselves out when it comes to most important energy source today, namely crude.

Accessibility, the nation should be able to access energy sources globally so that its economic and commercial activities are able to proceed smoothly without interruption. When it comes to the population, these things apply with equal vigor. It should be affordable to the citizens. When it comes to the poorest section, any responsible government should ensure that the poorest sections of the population are enabled to have access to the life time fuels. Any responsible government should do that out of compassion, out of sense of duty. The problem arises in effective targeting which is the bane in our country when it comes to any subsidy. Roughly 3% of the GDP goes on subsidy on various elements - food, fuel, fertilizers and so on but the problem lies in targeting not in subsidy policy per se.

When you look at the energy baskets, globally, and in India, we have been over the centuries moving from one fuel to another. Many of them coexist, but in different proportions, over a period of time. Today, globally when you look at it, the oil and gas occupy nearly 60% whereas in India it is much lower - 42%. Coal, when you look at globally, it is about 28%, in India it is close to 50%, hydro globally and in India it is roughly 6% and nuclear globally it is about 6% and in India it is only 1%. Gas and oil, the proportion of gas is expected to increase considerably in India in the coming years. Alternatives and renewables - today they occupy a very small proportion of 2 - 2.5% globally and about 1- 1.5% in India. But in the coming years they must start showing higher presence out of environment considerations. What are the factors which we have to reckon in any discussion on energy security and what are the realities we have to take cognizance of, let's just analyze them very briefly.

Uneven distribution of energy sources which is a very unique characteristic of the energy scenario today with its own ramifications. If we take coal, the top 5 countries account for close to 75% of the total coal reserves and if we take oil or gas, the top 10 countries account for over 70%. In fact, in natural gas, the top 5 countries account for close to 60%. This unevenness of distribution of energy resources adds to the complexity of an already complex issue namely energy security.

Tradability of energy sources is another characteristics. We change this over time and which adds another dimension to energy security. I mentioned oil and gas together accounts for close to 60%. In fact, oil is about 36 and gas is 24 globally. In 1970, when you look at energy basket in the world, gas was 0, in fact, gas was treated as waste product and it was supposed to be nuisance. Then something happened and gas started rapidly emerging as energy source. In fact, it was early 70s that the world woke up to the environmental alarm bells. They said this is not a sustainable development. The way you are burning up fossil fuels, go for more environment friendly fuels.

Acknowledging progress simultaneously, those days even pipe line technology was so bad, there was no means of transmitting gas anywhere even after they discovered its energy potentials, pipe line technology improved considerably. The most impressive breakthrough was in the scientists designing a technology to make it more portable after liquefying it, LNG. Today more than 30% of gas is being traded and 60% of what we produce as crude in addition to crude comes as gas. It has really assumed center stage on the global energy scenario and as more LNG facilities and more transnational pipelines globally come up globally, gas is going to become more and more tradable. Any fuel, if you look at the pricing, it depends on how tradable it is and portable it is. Unless it is portable, it cannot be traded. So portability and tradability will determine the pricing. That is why gas which was treated as waste product just 40 years ago, today it commands premium on crude because it gets traded actively and it has intrinsic merit over crude namely its environmental friendliness. Not that it is totally benign but it is much more efficient than crude and it emits much less harmful emission. These are some of the characteristics of energy security which we have to be cognizance of .

Today's crude price volatility, I think no one needs to be informed about this, 6 years ago what was trading at $20, today it has touched 100 and still counting. People say it could touch even 150 or 200. Six months ago, the Iranian Foreign Minister made a statement, what other oil rich countries have also stated, if there is any major disturbance in the from of attack on us, oil price could touch $200. Volatility which is exacerbated by uneven concentration of resources which is a geological fact, I don't think we can do much about it. Even minor disturbances could really aggravate matters today, speculation is another statement which has really been added recently. 6-7 years ago, when the oil rich countries raised the prices, they said about $10-12 is towards what is called terror premium. They said there are too many terrorists floating around. Then the terror threat abated but the price had to be protected so speculators entered the market. Today it is very widely believed that $20-25 of the crude price is accounted for by speculation. Speculation really means oil or gas which is traded not by the actual producer or actual user but by short term money players who have stakes on crude.

Close to 117 million barrels of oil gets traded every day and less than 15% of that is actually accounted for by the producer and the seller both together. This is one of the main reasons why crude price is threatening to get out of control. These are some of the facts again. Another factor is energy security increasing resource nationalism. 25 years ago, nearly 80% of the reserves were with international oil companies who invested heavily in technology, production and so on. Today the ratio is just reverse. 80% is owned by the countries in which the resources are located and only 20% is own by International Oil Companies (IOCs). The implications are two fold - one technology access. The technology necessary for increasing production, improving production, the resources lie with the countries. The money which is required to be invested lies with the countries. And IOCs, in the absence of any investment avenue, they are spending the money in sub optimal ways like rewarding the shareholders and so on. This will definitely have a long term adverse impact and overall production in productivity signs is already visible. In some of the major oil rich countries, productivity has been declining at an alarming rate. If this continues, the expectation is over the next 5 years, the slack which is normally taken as difference between the supply and the demand or the capacity of the supplying countries to meet the demand, the slack is coming down rapidly. This could have serious implications for countries like India which are major importers of hydro carbon. This could really lead us into spiral and we could be competing with many other countries for scant slack which is available. What it means is availability and accessibility may pose a problem in the coming years if this trend continues. Environment concerns, I mentioned about sustainable development is one factor which is really worrying most of the economies. That really calls for rearranging of our energy basket portfolio. What do we go in for less and what do we go in for more, these are factors, I think, which will be determined by how environmentally responsible a country wants to be. We are preparing environmental roadmap within the next 3-4 months and India has pledged that it will take responsible action to bring down the emission, not withstanding the fact that our per capita emissions are already among the lowest in the world for given economic activity.

Technology plays a very crucial role in enlarging the energy portfolio as I mentioned. What was considered a waste product has become one of the most useful fuels today, it is all because of technology and technology has an equally important role in ensuring that availability. Gas which is produced today in a country like Russia or Qatar, it travels to Japan, it travels to Australia, it travels to India, all because of technology and technology has played a very significant role in enhancing up environmental response. Also emissions, for instance, the performance is really very good. Today, the refineries are able to supply fuels meeting the most stringent environmental standards not only to the local population but also to the rest of the world. Last year we exported 30 million tons of fuel, all because of refineries have been upgraded and modernized to meet the environmental standards.

All these factors are to be reckoned by us in determining our energy security. What has India done? Very briefly let us recap, after 1991 when the economic reforms were unleashed or initiated, as part of the reforms, 5 years thereafter, we started working on enhancing our own exploration efforts. That time India had been explored hardly 11%, today it stands for impressive 30% - 40% has been opened up, 30% has been explored reasonably well. But in my view, action has just begun. The results are extremely impressive. We have been able to enhance our producible reserves by about 60% over the last 6-7 years as a result of new exploration licensing policy which enabled us to attract foreign investment, foreign technology and foreign practices , all this have helped us. Situation is very good now and now dividends have just started pouring in. Within the next 5 years, our oil production is slated to go up by nearly 40% and our gas production is expected to go up by 150%. Over the last 6 years alone, 54 discoveries have been made out of which 18 have been declared to be commercial and 7 have been appraised and 2 are under active stages of development. Progress indeed is very striking. In addition to that, improved oil recovery, enhanced oil recovery, these technologies have been invested in now by ONGC and other private players and as a result of that, over the past 3 years, we have been able to accredit an additional 31 million tons of crude. Given today's price, the payback has been extremely good on our IOR, EOR. I am not trying to be complacent on this, our global recovery rate in India is still very low. It is only about 30% as against the global average of 45 and today globally they are working at improving it to close to 55%. If only we could do that over the next 4-5 years, our energy security gets taken care of in a much better fashion compared to earlier things. Our ONGC Videsh Ltd is very actively and aggressively pursuing its efforts abroad in order to acquire participating interest in oil and gas acreages. Today we are present in the lowest 16 countries, we are pursuing every possible effort to enhance our access to energy from outside the country also. Transnational pipelines which we are pursuing, of course, these take a very long time, they have very long gestation period because even within the country, they have so many problems. Finally, economics will take over all the other considerations and we are very confident that these pipelines will become a reality and they will add to our energy accessibility and energy security. But policy dispensation is essential , infrastructure is essential.

I am glad to report that with the correct policy in position, 2-3 recent policies you are aware of, one was how to determine the price of gas. This was an issue which was engaging everyone's attention causing a lot of worry and rating consternation and so on. Even there were some interests which were trying to hijack the whole issue, but, fortunately, government brought it very quickly and strictly under control and today very investor friendly, at the same time, acceptable to consumers, that type of policy has been put in place and the gas pipe line policy is also in position now. All this has contributed to huge investment currently underway in the country. Over the next 5-6 years, the whole country is going to be connected through the nation, a wide network which enables us to connect all the consuming centers, to al the production centers, after all gas has to be mobile. No region should be left out and no production should be stalled for want of transportation facility. With this necessary infrastructure in place, we are very confident that economic activity and the commercial activities will go on with the help of new found energy resources.

There are certain key issues when it comes to energy security. Production goes on, someone has to buy it, someone has to process it, someone has to refine it and supply it to the consumers. The question of affordability, I mentioned about the country and the consumer, the oil industry has to be financially viable and the financial soundness has to be ensured in order to provide for the continued ability to buy crude, refine it and then supply refined products to the consumerd. If only it could just apply through the consumers, trade is fine but, it is not easy, you just don't buy the rice from the shop and eat it straight away. Yu have to cook. You have to buy crude and refine it and you have to market it. This country which has vast network today, there is no single dry out anywhere when it comes to the essential petroleum products.

You might have read reports, in China , when the government was delaying decision on the correct market determined prices, the government run oil companies they deliberately went slow on refining and there were many dry-outs leading to riots and there were 2-3 shooting incidents. In a country like India, these things never happen. The unwillingness or inability of the government to go for market-determined prices could affect, hamper, handicap the oil sector in the long run and they could seriously compromise the capacity to pursue our energy security objectives. Today, we really feel very small when we go and stand in front of a country with a Chinese competitor standing there. He says ok $10 billion given, we are not able to extend even 1 billion. That is a sort of capacity and if the present state of affairs continues, even that 1 billion will become 1 million and no one will give a second look at our companies. These realities we have to be really cognizant about and take corrective action on time, otherwise it may become too late. Any sector which is doing well, it is going to be interfered with in adverse way that sector will go sick and it will take a very long time and it could prove very costly to take corrective action. These factors had to be kept in mind and public opinion has to be mobilized in our favour to be able to do this.

There are some undesirable trends which are emerging today because of distortion in the market in the oil industry. The Prime Minister himself was persuaded to say that if this type of distortions continue in the market, the whole system could collapse. This is what he really meant. He was sounding an alarm bell. Not only that it is really leading to lot of wasteful use of resources, valuable fuel like kerosene, which is at par with petrol and diesel when you look at the energy content, just being filtered away. It is just being used to adulterate with diesel or petrol. This is very harmful practice, even from the environmental point of view, apart from the economic point of view. Inefficient allocation of resources, public sector is duty bound to protect the interest of the consumer and keep supplying irrespective of the financial health but private sector is not under such obligations. Unfortunately, what happened was private sector which really opened the retail outlet. In order to expand the facilities, they could not continue operation because of unrealistic pricing policy. So, all those assets which have been created at a huge cost, they are lying waste, ultimately the loser is the consumer. He foregoes the benefits of competition, he foregoes the benefits of expanded infrastructure facility which he could avail, if only they were functional. Today, as I mentioned, OPEC countries have been, time and again, ensuring that demand for every barrel of oil and every cubic meter of gas has been met. So, the question today is not one of availability, the question that might arise tomorrow, if unsatisfactory situation continues, will become one of affordability whether the country can afford to go in for fuels.

These are some of the issues which we really had to take note of whenever we discuss issues related to energy security.

Thank you.