Vipul Tuli, Senior Partner,
McKinsey & Company,
speaks to Neeraj Dhankher
on what would it require
for India to reduce its
dependence on energy
imports to a sustainable
level by 2030. Excerpts.
McKinsey has recently come
out with a White Paper which
addresses the steps to be taken
to reduce dependence on energy
imports by 2030. How did this
idea come about? What is the key
message in the White Paper?
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.
Do you think it
is possible to
eliminate
dependence
on energy
imports by
2030?
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.
The situation in coal
sector has more to do
with mismanagement rather
than supply and demand
management. India is importing
coal today despite the fact
that it has one of the biggest
coal reserves in the world.
What do you suggest to tackle
such issues?
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.
There have been talks of
imitating the US as far as
the success of shale gas is
concerned. Do you think it can
play a role in the development of
India’s energy economy?
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.
One big impediment is lack
of service industry in India
for shale to succeed. There
are hardly any service
providers in India.
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.
Do you feel that global oil majors
in the US are keen to come to
India and invest in this industry?
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.
The NELP-X was launched
recently. How do you think the
recent policy reforms, especially
gas price increase, will impact
foreign investments in 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.
The LNG industry is poised for
growth in the wake of lower
domestic production of gas. How
do you see this segment evolving
in the future?
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.
There are reports that the
government is now looking to
give boost to Indian shipping
industry through manufacturing
of LNG vessels indigenously.
What are your views on this?
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.