India’s Energy policy – For the people or against the people

Wrong policy leading to oil shortages

India most vulnerable to oil shocks

Raising concerns over the rising oil prices and alarming the people is not the reason a government is elected. The 2007-2008 oil shock was substantial reason to wake up and formulate a policy which would lead to energy security. Instead, 5 years later we have an energy crisis on hand. The energy crisis of a nature which can throw India of its tom tommed high growth rate into the abyss of negative growth. So where has the policy initiative bungled up.

Has the much promised strategic petroleum reserve been created?
In December 2009 the Government had indicated the setting up of an SPV called Indian Strategic Petroleum Reserve Limited (ISPRL) that would create a storage facility of five million tonnes by 2012. This was to effectively increase India’s strategic reserve to 8.5 mt which would be enough to meet 90 days of consumption. However this has yet to see the light of day and it would really go a long way if the government would give more information on the same. At present the website does not provide any status information and the site was last updated in September 2009.

While Cairn comforts, RIL increases anxiety
The manner in which the government has gone about handling the Cairn issue and dealing with KG6 crisis leaves little to be desired. While Cairn which produces oil was subject to harassment for no wrong doing on its part, RIL is allowed to toy with India’s biggest energy find ever. Lack of transparency right from the cost of the project to gas throughput leaves the average citizen wondering what’s going on? Today government met to discuss the KG6 issue but what is the action initiated? Will the government continue to play with the common man just to pacify the largest corporate of private India.
IMHO just like the army was invited to build the overhead bridge in Delhi which collapsed prior to the Commonwealth Games, similarly the army should be given the charge to find out the exact issue which is crippling gas production at KG6 and if possible rectify the same.

CBM policy still no gas production
Its been many years since the CBM policy was announced and barring for Essar oil and another company’s Ranigunj blocks none of the corporates ho had been issued blocks have reported any progress. Of the 17 year licences 4 years have already passed. And I was under the impression that it is much quicker to develop a CBM field than a natural gas well!

Coal production –wishful thinking or time wasting
India has the 4th largest coal reserves in the world, yet we import coal. From the time a coal block is allotted on an average it takes 8-10 years to develop a coal block in India as against 4-5 years overseas. Beaurocracy and red tapism is what prevents progress and we hear that the PMO is going to do something about it.

Nuclear production – pursuit of the wrong fuel
India has the 4th largest reserves of thorium in the world and these are sufficient to fuel 2500 years of electricity needs. With technological development available as far back as in 1970 one only wonders why we want uranium and I keep scratching my head as to why would the government not promote this fuel source. You would be probably scratching your head 40 years from now still trying to figure this one out.

Shale gas – huge potential with game changing propositions for India’s fuel security. Alas government policy
India has large shale deposits, with good prospects in the Gangetic plain, Punjab, Rajasthan, Gujarat. Tamil Nadu , Andhra and the north-east . If these reserves are tapped it would make India self sufficient in energy. Besides being cheap, the revolutionary potential of shale gas, has the potential to revolutionise both the world energy scene and global geopolitics and virtually turn India into a super power. However the national policy is not in place and the draft is gathering dust in the corridors of Delhi.

So where do we go from here?
If the government does not, act one thing is sure that the reforms initiated since 1991 would be reversed. Already the financials are looking similar to 1991. And even if the government pacifies the populace with white lies, the stock markets and currency will enlighten everyone by tanking abruptly.
In these accelareted times of world economics and the energy crisis created by the US -Iran stand off, India is most vulmurable as nearly 80% of the crude oil is imported. If the various arms of the government would come together to iron out a consolidated energy policy the world be at India’s beck and call. Else shit would hit the fan.

Vinit Bolinjkar Head of Research, Ventura Securities Ltd

Tel: | Mobile: 0 9730836363

How the common man can protect himself from the Iran war

Considering the risks of the latest Gulf War, Indians can take a few steps whichc would drastically help reduce impact of a sharp rise in the price of the fuel oil outlined below

War in the gulf can fire any time from out of control forces.
While the Americans talk to the Iranians through back channels, posturing with military might is only escalating. USA has just added one more aircraft carrier in the Gulf and Iran is to conclude its 10 day long military exercise with the launch of its Shabab 3 missile system that has a range of over 2000km. The American military choppers are flying too close to the Iranian war games and the risk increases that skirmishes could escalate into war.

American aircraft carrier

The trigger happy Israelis are just waiting to break ranks and are like blood hounds on American leash waiting to launch. While the Israelis have clearly stated their intent that sanctions will only give more time to the Iranians, they would like to act with immediate effect and use force to neuralize the nuclear ambitions of their natural foe. While the Israelis fret and fume over Iran they are busy planning another raid into the Gaza strip and Hezbollah is ready to strike Israel with tens of thousands of very deadly short-range “Katyushka” rockets.

Mathew Kroenig, an influential CFR member has in an article said that “a surgical strike on Iran’s nuclear facilities is the least bad option. [article link]. And through this article one may get a clear idea that the aggression on Iran is a high probability. Unconfirmed sources from Washington indicate that May would be the best time to launch the aggression.

Will Iran wilt? With sanctions which would virtually crumble it economically (70% of its earnings are through oil) it is unlikely that Iran would be tethered and would surely strike back in through terror action on oil installations of GCC countries.

How to protect oneself from this global insanity?
With the world already on boil with respect to energy resources which are getting increasingly scarce, an event like this can only derail economic revival of a fragile economy besides hurting us through price inflation. So being forewarned is being forearmed and folks back home can do well to take proactive steps.

Stock up on food supplies and household products
Make sure you have at least 6 months of supplies. Cereals, grains, dairy products processed foods / canned can be stored for months if not for years. It will help protect you from inflation and non availability. Your elected leaders are so caught up in their own fancies that in case of a prolonged military conflict, fuel could be rationed besides becoming more costly. India has barely one month of strategic oil reserves and despite being wary of the situation has not done much to build strategic reserves. Vote banks and money accumulation for for self prosperity does not allow them to think beyond their over grown tummies.

Buy oil futures on MCX
One barrel of oil has ~158 and hence 1 contract of oil valued at Rs 5 lacs (+/- 30,000) for 100 bbl, considering that you travel 50 km a day on average and with a mileage of 8 km per litre will typically last you for 2528 days or 6.25 years.Now this is cool insulation against any price hikes. There is a possibility that oil may rise by $ 50 /bbl or could go as high as $300 if the war gets prolonged. The value of the contract would also appreciate and help insulate much of the risk associated with the price hike. Now middle class individuals would wonder where to get the RS 5 lacs from. fear not the margin for buying this contract is only 4%. But you may put up Rs 1 lac as up front margin and be blissful.

Disclaimer: One thing that investors need to consider is that there is the possibility of downside risk too and should factor in this before placing the trade.

Buying shares of Cairn energy is also a good idea
I believe that Cairn India is a good long term investment. You may read a few reports that I have uploaded on Cairn India update and initiating coverage on Cairn India.

Ask government to take actions to reduce fuel profligacy
Did you know that telecom companies are the second largest guzzlers of heavily subsidized diesel and they can easily shift to renewable sources of energy to power their their cell grid. Pressure companies which have got license to produce oil & gas, coal bed methane to increase production and seize blocks if work is not upto speed. (More about this in another article).

Self help can go a long way
Further self discipline like walking for short distances, car pooling and use of modern tools like email on line meetings etc would help curtail travel and help in lowering overall consumption.
Encourage and promote wind and solar energy and encourage scientific discoveries of new and portable wind mills which can be mounted on building tops and sky scrapers.

Remember we have peaked in terms of global oil production
Remember global oil production is declining at 4-5%, world oil production is growing at 1.5-2% leading to a demand supply mismatch of 6-7%. Virtually all the large oil fields of the world are in perennial decline stage. Further no new large oil field has been discoveries have been made for years. Saudi Arabia has only said it can ramp up production. They have to prove that they can produce 10 mbd and for sustained period in case Iran is destroyed by war.

Higher price of oil is a reality, the Iran war will only hasten it.

Vinit Bolinjkar Head of Research, Ventura Securities Ltd

Tel: | Mobile: 0 9730836363