India's tryst with high oil prices has never been a happy affair. Every crisis from 1973 onwards has shaved off a few percentage points from its gross domestic product (GDP), and pushed the inflation rate to obscene levels. A sharp increase in crude prices, which touched nearly $100 a barrel, saw the country's GDP tumbling by 5.2 per cent and inflation rising to an unmanageable 17.1 per cent in 1979. And the1990 oil crisis, that brought the now famous foreign exchange crisis for India in its wake, saw GDP growth tumbling to 1.3 per cent and the inflation rate topping 14 per cent. A 2002 International Energy Agency study shows that an increase of $10 (Rs 440) in crude prices could pull down India's GDP growth by a full percentage point. Unfortunately, this vulnerability has only accentuated over the years. And it's easy to see why. Domestic crude production stagnated at 33 million tonnes (MT) between 2000-01 and 2003-04 before dipping to 29.40 MT in 2004-05, even as consumption jumped from 106.52 MT in 2000-01 to 124.3 MT in 2004-05. The result: the country was forced to import 76 per cent of its domestic oil requirement. And this demand is only likely to grow.

As the country's GDP growth rate stabilises at 6 per cent-plus per annum, it will obviously consume greater amounts of energy. This will necessitate the import of greater quantities of crude. Unfortunately, the oil import bill has already assumed unmanageable proportions. It has jumped 118.7 per cent from Rs 53,516 crore in 1999-2000 to Rs 1,17,032 crore in 2004-05. In the first half of 2004-05, the crude import bill, at Rs 60,942 crore, was 58 per cent higher than the corresponding period in the previous year.

Now, crude prices have touched $60 (Rs 2,640) a barrel and show little sign of easing. This spells danger with a capital D for the Indian economy. The government has largely managed to shield domestic consumers-mainly due to Left Front pressure-from the debilitating effects of this price rise. But this came at a huge cost; subsidising consumer prices of fuels is taking a heavy toll on the country's refining and marketing companies. In the last fiscal alone, their under-recoveries were at Rs 22,000 crore-clearly an unsustainable proposition. Says an oil analyst at equity broking house Motilal Oswal: "This is at best a stop-gap arrangement."

"Our only choice is to do what France did in the 1950s, or what China is doing now, to secure our energy sources overseas" Subir Raha Chairman & Managing Director/ ONGC

But the burgeoning oil bill is not the only worry that India has. China's emergence as a global power and its seemingly inexhaustible appetite for energy has brought it into direct competition with India in the search for oil and gas equity abroad. ONGC Videsh (OVL), a 100 per cent subsidiary of the Oil and Natural Gas Corporation (ONGC), is pitted against China's largest oil producer, China National Petroleum Corporation, in its quest for a stake in embattled Russian oil major Yukos' core asset Yugansknefegaz. Then, with the us and other Western nations tightening their stranglehold over Arabian oilfields, Indian players have little choice but to turn to other oil-rich, but politically unstable or "untouchable" states such as Congo, Sudan, Russia, Vietnam and Iran. Subir Raha, Chairman, ONGC, sums up the scenario in a nutshell: "Our only choice is to do what France did in the 1950s, or what China is doing now, which is to secure our energy sources overseas." After all, India, which has 16 per cent of the world's population, has only 0.4 per cent of the world's oil. So it is virtually impossible to become self-sufficient.

ONGC has already invested $3.5 billion (Rs 15,400 crore) since 2000 in oil equity abroad; Reliance Industries has invested Rs 1,307 crore in e&p (exploration and production) activities in India, Yemen and Oman in 2004-05; GAIL India is planning to invest Rs 600 crore in Myanmar and Indian fields over the next three years; Indian Oil Corporation has tied up a gas deal in Iran; and new kids on the block like Essar and Videocon have also jumped into the fray. The government is firmly backing these moves. "We look upon this as a national endeavour. If Reliance, Essar or any other private Indian player, need our assistance in any manner, my ministry will be more than willing to extend a hand," Union Petroleum & Natural Gas Minister Mani Shankar Aiyar told BT in an exclusive interview. (See There Is No us Pressure On India).

Given the stakes involved, it is easy to understand Aiyar's propensity to jet across the globe, and his use of economic diplomacy to secure India's energy security, though the end results may still be open to question. In just over one year, he has moved aggressively on an agreement to transport Iranian gas to India through a pipeline over Pakistan. He has also started negotiations with Venezuela, Turkmenistan, Myanmar and several other countries to participate in their hydrocarbon sectors. Once these projects go on stream, the country will get assured supplies of oil and gas at pre-determined rates. This will partially insulate India's economic prospects from sudden spikes in global crude prices (see The Worldwide Search)

Reliance Industries (CMD Mukesh Ambani seen here) has invested Rs 1,307 crore in exploration and production activities in India, Yemen and Oman in 2004-05

But if India's belated and somewhat lackadaisical entry into the global oil game has achieved limited success, the domestic scenario is pretty much a mess. The government failed to pilot the Petroleum Regulatory Bill, 2002, through Parliament (it is now lying with the Standing Committee of Parliament); if passed, this would have resulted in the establishment of a regulator and resolved many of the issues plaguing the gas industry. And despite doing away with the administered price mechanism in April 2002, the government continues its vice-like grip over the pricing of petrol, high speed diesel, aviation turbine fuel, kerosene and liquefied petroleum gas. To compound matters, it has capped its oil subsidy bill at Rs 3,000 crore; this means oil refining and marketing companies have to take a big hit on their bottom lines. With politicians of all hues joining the clamour against de-subsidising the oil sector, there is little hope of any significant relief for oil companies.

The one silver lining that has kept downstream companies going is the healthy margins in India. In the last two years, refining margins have hovered at around $6 (Rs 264) a barrel; this is more robust than even those in Singapore (the Asian benchmark), where the gross margin is $5.5 (Rs 242) a barrel. But under-recoveries can still deter companies from making further investments in the country. And unless the government allows companies to charge market-related prices, very few will be interested in entering the sector.

The overall picture, however, is not totally bleak. Large recent oil and gas strikes in the kg Basin and in Rajasthan have led to a revival of international interest in India's hydrocarbon sector. Several big names in the world of petroleum have bid for a slice of India's oil and gas story under the New Exploration and Licensing Policy-V (see The Search Within). The policies initiated by the government in the last decade-and-a-half have led to the addition of massive domestic refining capacities. Reliance alone has set up a 33 MTPA refinery in Jamnagar (Gujarat) and is now in the process of expanding it to 60 MTPA. The Essar Group is building a 10.5 MTPA refinery in the same district and hopes to commission it in the third quarter of 2006. Private companies are now present in every segment of the petroleum value chain and India has even emerged as a petroleum exporter. In 2003, it exported petrol, diesel and petro products worth Rs 16,781 crore.

In conclusion, it is fair to say that the government has taken all the right initiatives and made all the right noises-except in the sphere of retail prices. The need of the hour is to go all out to ensure the success of these initiatives. The Chinese example will be a good one to follow.