Vipul Tuli, Senior Partner, McKinsey & Company

The original thought for this White Paper came from the issue highlighted by the petroleum minister in August 2013, wherein he invited thoughts on whether energy independence was possible by 2030 and to what extent this could be achieved. We referred to Mckinsey’s existing and ongoing research in the global and Indian energy sphere. We discovered that our dependence on energy imports, in a business-as-usual scenario, is likely to go up from 30 per cent to over 50 per cent. This is clearly unsustainable. If we don’t do something, we will become the only country in the world to have this high a dependence on energy imports. This made us look for solutions and we came up with 10 initiatives which have been outlined in the White Paper. These include increasing domestic supply and reducing demand through energy efficiency measures. These will help reduce imports from 50 per cent to about 30 per cent, which is sustainable. We have also talked about additional measures which will help reduce imports further to 15-20 per cent. The issue of institutional support has been addressed too. First, we need some form of mechanism to coordinate better between different ministries and integrate our efforts. Second, we need to develop our ecosystem of technology. Third, we need to ensure that there is enough freedom for private sector to access, price and market its products.

Generally speaking, it is very difficult to change much in the energy sector in five or 10 years, particularly in the oil and gas sector. However, taking the best practices from around the world, we have learnt that in 15 years, you can change almost anything. The first proof of the pudding is when you assess the viability of the actual supply response which is implied by the 10 initiatives suggested in our White Paper – around 1.2 billion tonne of coal, around 80 million tonne a year of oil, around 350- 400 mmscmd of gas, around 100-220 giga watt of renewable energy – none of these are actually unachievable. In the coal blocks that are allocated today, whether to CIL or to private players, there is potential of close to a billion tonne of coal production every year.

Our view is that we have to look beyond the short-term. In this White Paper, we have consciously tried not to focus specifically on the current crisis and have tried to look beyond that. Our focus has been on the fundamentals such as the extent of coal reserves, what it would take in terms of pricing, market access, access to blocks etc. Our view is that it is fully possible to solve these issues.

These are early days for shale gas in India. We know that there are initial technical indications that reserves exist, that it will take some drilling and characterization of the rock to know how much are the reserves and how easily they will flow. We also know that right pricing, access and policy framework is required to give the impetus to industry. Our view is that all this is now coming into place. Shale gas policy for PSUs has already been announced. If that is extended in the next few months then it can be quite a game changer. Of course, unless you drill you will never get to know what there is. At least for the next few years, the priority should be to drill, to characterize and to seize the opportunity. The service companies are now showing interest. Foreign players are talking to India’s national oil companies on what it will take and how they can help. India can gain an understanding from the learning curve which the US has undergone for almost 20 odd years. So India can grow a lot faster. The challenge for Indian players is to have the confidence to say that they can do this and bring in the companies and for the government to put the right framework in place to make it happen. At least for shale, it is difficult to do crystal ball gazing as one can go wrong in the timing. But I do think that it is probably not as near term as two-three years, and also probably not 15 years, so it is somewhere in between. The advantage that we have is that it is all onshore. The wells may not be easier but are faster to drill. Normally, you may have to drill a thousand wells to have the same production as 50 wells of conventional gas, but those thousand wells will be drilled in 10 days. So actually when you start moving, and engage multiple organizations to go and do the prospecting and drilling, that will be faster. And I feel that the gas prices we are going to have in the country are a lot more attractive. Very few countries in the world have $8-9 per mmbtu of well head price for gas. It requires a different mindset for a big oil company to drill lot of wells. So the challenge is for the bigger oil PSUs to do it faster. In the US, big oil PSUs have faced many challenges. So either the small oil companies are going to be successful or the big companies will have to learn from small companies.

That is correct but is not necessarily an impediment. For instance, if you drill a big offshore well, you need a big drill ship which costs hundreds of millions, however, if you drill 10 onshore wells you need a drill ship which costs $20 million. So, relatively speaking, we are not talking big money. With one rig, you can drill 15- 20 wells a year. Therefore, it has very different economics of scale but the incentive needs to be there for service companies to do it. This is a practical example of why it may not take two-three years. If it is clear that reserve is there and that there is scope of production then the supply response from service companies can come very quickly. It is not like a power plant where you need four years to build.

Global oil majors have had limited success in the unconventional space. The players in the US have been the smaller oil companies. These companies overseas have the technology which is extraordinarily helpful to India.

It will be difficult to comment on that but I do think that the mood today is far more positive than it was six months ago. Whether it is positive enough though to help NELP-X sail through, is difficult to say. We will have to wait and watch. The success of NELP rounds depends on several factors including the views companies take on prospectivity, ease of operations in the country and gas price and freedom to market the gas.

It is clear that we are going to see rapid growth in LNG and it will grow in a healthy fashion. The real question that hangs over the industry is on affordability and pricing. When we deregulate liquid fuels, it helps the relative affordability of LNG. But the question is when we have LNG that lands at $14-15 per mmbtu and it gets delivered to customers at a price between $15-25 per mmbtu, affordability is an issue. Power is not going to be an area of big growth, maybe peaking power might. You will have to look at segments where the industry can grow. You can look for, say, peaking power to grow. We can look at some parts of city gas, industry, LPG substitution and some areas which are off the grid which can take LNG by road etc. So it will be a question of looking for these segments and take it price wise, as well as other segments that need it from the point of view of clean fuel.

For us, one of the important elements of a healthy energy system is strong local technology and manufacturing ecosystem. To our mind, this is a crucial step in that direction. We need core building blocks like shipyards etc and the ancillaries around that. They will then start to adapt and improve technology which improves their efficiency. I feel India’s time has come to set up some serious manufacturing capacities of these kind.