Global Energy Market – India’s Strategy during and post COVID19

Over the last few years, the oil market supply dynamics have been constantly changing due to USA emerging as a supplier and shaking up the OPEC+ stability, the Russian sanctions,political crises in major suppliers like Venezuela and growing tensions in Iran and the Middle East. In addition to this, COVID19 has put paid to hopes of market revival and is likely to change market structure, geo-political scenario and supply – demand balances. The economic slump in the last six months has put a severe stress on global energy. Since there are no takers for excess oil supply, the industry has taken a deep hit. OPEC+ has extended production cuts through 2021 and USA’s shale oil producers are facing a tough situation due to market price slump. Now, the question of who is going to survive is key. Shell, BP, Exxon Mobil have already cut down on exploration investments while the gas markets have also seen a crash and are struggling to recover.

The Impacts of the COVID19 Crisis on global energy demand and CO2 emissions report highlighted that the demand for oil declined by five percent and natural gas by two percent in the first quarter of 2020. A fall in import numbers from China and an impending global recession has led to an eight percent decrease in demand for coal in the first half of 2020 vis-à-vis the same period in 2019. 

The falling demand in global energy markets was further aggravated by the conflict between Russia and Saudi Arabia which had the potential to turn into a war between OPEC and non-OPEC. Even though the OPEC+ came back with an agreement, the differences are still present; potentially altering the contours of the energy game in the international market.

India’s strategy amidst this seems clear.

  • India is now focussing on oil storage and has bought enough supply to cover a good percentage of its demand. This has potentially altered the global energy business structure and dealings since it is a major consumer of oil.
  • India’s renewal and solar power agenda of achieving 175000MW by 2022 and 450000MW by 2030 will now be expedited while ensuring sustainable energy transition.
  • India’s bid to emerge as a gas economy is gaining necessary government thrust, regulatory processes and market-oriented reforms.
  • India will diversify its collaboration with countries – moving away from Middle East dependence and associating with important countries like USA, Russia, etc.

However, uncertainty makes it tough to finance new projects, significantly slowing the transition to a new energy economy immediately. So, till 2021, the focus is going to be on stability of the economy and for such a strategy to work, suppliers of energy would look for more stable and growing demand centers. India’s strategy would be to leverage this opportunity and look for good Oil & Gas long term deals in terms of trade as well as welcome new investments in the energy sector. 

At the same time, countries especially the larger economies on both demand and supply side would look to build its strategy towards preparedness for 2022 and beyond. While internal stability is the focus in the current year, countries are also resorting to effective scientific collaboration using big data, combined lab resources and rapid scale-up of vaccine manufacture in order to get back to normalcy.  The focus will shift to effective partnerships to create technology-enabled redundancy, resilience of economy & business rather than cheaper manufacturing and efficient yet low cost supply chains.

In this context, India expects that US, OPEC+ and Russia cannot work at loggerheads and must collaborate. Therefore, oil prices may rise in later half of 2021 or 2022 onwards due to collaboration strategy as well as supply reduction due to bankruptcy or closure of some of the players and faster expansion of Renewable Energy.

In addition to the above, India needs to adopt a five-pronged strategy – both under progressive optimistic scenario and challenging scenario:

  • Diversify Oil & Gas supply portfolio and collaborate through trade relationships with countries like Russia, USA and others to reduce dependence on Middle East
  • In the current scenario, India has already opened the economy gradually and cities are operating utmost normally though there is still a COVID19 hangover and sudden spurt in cases in a number of cities. In this context, India would fill its storage with oil at lower prices and plan to gain going forward. A stronger collaboration with challenged countries like Russia will result in a mutual win-win situation for both countries
  • India should expand its Renewable Energy (RE) Plans further and must lay greater emphasis on faster growth. India should also lay emphasis on natural gas and use it as a source of power in conjunction with RE to meet peak demand. India should make more LNG terminals operational on East coast and West coast faster and look for long-term and medium-term LNG deals with built-in Price Review provisions
  • India is already encouraging investments in exploration and infrastructure building and aims to have technological collaboration with Russia, US, Australia, Japan etc. and build internal strength and resilience
  • India is already collaborating with countries for vaccines and has lent a helping hand to other countries with PPEs etc. during the beginning of the pandemic, in order to bring about a mutual collaborative approach. Such an approach has created goodwill and hence nations are more willing to collaborate with India even under challenging situations. This is more so because India is a major demand Centre for all major nations when it comes to revenue generation and economic recovery. India is already leveraging its position in this regard.