September 28, 2012
US Department of Energy
Changing Calculus of Energy Security
Recently a number of changes have impacted the world energy scenario and difficulties in energy supply and security so important and vital for any economy have accelerated. While our policy makers, researchers and scientists were engaged in improving energy efficiency and making renewable energy more affordable in order to achieve our long term goal of low carbon growth, political changes in the Arab world, the so-called Arab Spring, and the Fukushima nuclear accident in Japan have focused minds on the real challenge of energy security in the short-term especially for developing countries like India. However, at the same time, the shale gas revolution in the United States (hopefully to be replicated elsewhere), has opened up new possibilities for dealing with energy constraints.
2. Events in North Africa, particularly the conflict in Libya and tensions in the Middle East altered the projections and outlook for oil. The higher crude oil prices, resulting from fears that events in this region, would impact oil supplies, have persisted. This has led to high inflationary pressure on the world economy as a whole. For India, which was already grappling with high rate of inflation, higher oil prices have made the situation worse. The high oil prices have also compounded our fiscal problems because of the cost of fuel subsidies. It was mentioned earlier that some 30 % of India requires improved infrastructure. The fact is we are grappling with the serious problem of 300 million people having no access to commercial energy. Night-time satellite images show large parts of India as areas of darkness. Energy security is practically a matter of life and death for many.
3. We are keeping a close watch on the developments in the Middle East as not only a significant percentage India’s oil consumption is imported from the Middle East but also because the Gulf is also home to 6 million Indians and our economic engagement with the countries of the region is around USD 120 billion. The region is also important for India’s food security as we source a large percentage of our fertilizer from it. With respect to crude oil while our domestic production was about 38 million metric tonnes of crude oil in 2011-12, we imported about 172 million metric tonnes of which about 70% was from the Middle East. We have been trying to diversify our procurement but as a major percentage of discovered reserves of oil remains in the Middle East, which is also our neighbourhood and which therefore, makes freight cost manageable, there is a limit to which India can diversify.
4. There was also a sudden spurt of demand for fossil fuels, especially natural gas following the Fukushima accident as Japan closed down its nuclear power plants for inspection and sought to replace the shortfall with natural gas. Germany also decided to shut-down 8 of its nuclear power plants immediately after Fukushima and subsequently decided to close down all 17 nuclear plants by 2022. These developments altered the energy balance and put a lot of pressure on natural gas with prices rising to record levels.
5. The only bright spot has been the technological breakthrough which have led to exponential increase in production of shale gas in the US; and have changed the market dynamics a bit. As US no longer needs some of the LNG supplies it had tied up earlier, LNG prices have come down recently. Energy analysts believe that downward pressure on prices is likely in the medium term as new liquefaction plants will come on-stream in Qatar, Indonesia, Papua New Guinea and Australia. However, this may not actually transpire as demand is highest in the markets of Asia and it is growing; hence the offset of LNG not brought to North America would not be large enough for relief in our markets. I am happy to hear that US and Canadian gas will enter the global markets by 2014-15 and 2016 respectively. That seems a long way off. It is only the development of a truly global gas market that would give India the benefits of increased supply made possible by horizontal drilling and fracking. This can happen when the US and Canada become exporters of LNG. The IEA has spoken of a potential ‘Golden Age of Gas’. We are looking forward to buying large LNG volumes from the US and investing in the shale gas sector. Gas can indeed be a (carbon light) bridge to a future based on new technologies including renewables.
6. India also hopes to enter into shale gas exploration soon. The Ministry of Petroleum and Natural Gas of India is currently engaged in formulating the shale gas policy and is likely to announce the shale gas exploration acreages next year. India is also working towards doubling its LNG import capacity in next 5 years and also import gas through pipeline from Turkmenistan. This will significantly increase the contribution of natural gas in India’s energy mix from the current 11% which is low compared to the world average of 24%.
7. It is now being said that as the shale gas revolution extends to oil, and as big discoveries in Brazil come on stream, as oil from oil sands come on the market, and there is expansion of production in the Caribbean, the US could be free from dependence on the Middle East. I do not see this leading to US disengaging itself from the region as some analysts would like us to believe? We see a major power like the US continuing its engagement in this region; but it is the emerging economies like India which will continue to require oil from the Middle East and will have to increasingly take on additional responsibilities. The area is geo-politically crucial, its reserves are still the most critical for the world. For India, engagement with all our energy partners, including Iran will be necessary. But if there is a lesson we should be taking away from what US has done, it is that we should accelerate the pace of exploration and production in our own territory and our waters. For energy security, there is no place like home. We need to leverage the increased possibilities of the Indian Ocean basin holding large reserves of natural gas – as evidenced by recent discoveries off East Africa (all the way from offshore Mozambique through Tanzanian waters and then to Kenya, including onshore).
8. Fukushima has also affected new build in nuclear energy. Germany and Switzerland as noted have announced plans to phase out nuclear power in the coming years (Germany-2022, Switzerland-2034). Japan itself is under pressure to phase out nuclear power by 2040. For a country like India, which has huge demands for energy, nuclear power will continue to be part of its energy mix. Also, we must remember that low carbon growth without a significant growth in nuclear based power plants will be very difficult to achieve, given the current state of technology. China is moving ahead as planned with new reactors. India’s nuclear programme will also continue, with both domestic (700 MW) and foreign reactors. Knowledge of how others are proceeding – if put in the public domain – would help. It is important for our public to be aware that the US is continuing research on nuclear reactors and would be using them in its energy mix in the future, like other advanced industrial countries.
9. The shale gas revolution has had spin offs for the coal market as coal-fired plants in the US are switching to gas. This has resulted in import of coal to Europe and now an Indian group has entered into a long term contract for import of coal from the US. Integrated world markets for both natural gas and coal augur well for the world economy. It is heartening to read that some believe that technologies may yet make oil shale and kerogen reserves such as Green River viable sources of fuel. If so, Dr. Hibbert’s peak will have become a bit higher and there could be a real impact on energy security.
10. This is not to underestimate for a moment the criticality of climate change issues and the need for investments in development of green and renewable energy technology. I am greatly encouraged to hear about our teams working on solar energy, and bio-fuels. Both are particularly relevant for India. Germany produced 17 per cent of its energy from renewable sources in 2010 and it plans to raise it to 35 percent by 2020. In India the installed capacity in grid connected renewable energy has grown to 25000 MW, which is around 12% of total installed power capacity. The government has established a mission named after our First Prime Minister Jawaharlal Nehru which aims to have 20,000 MW of grid connected solar power by 2022. The need to align prices with conventional fuels will keep driving innovation in this sector. While wind based electricity has already achieved a grid-parity price, prices of solar power have come down and could achieve grid parity in the coming years. If renewable energy is able to meet even 20% of the demand, this would have deep impact on energy security of India, which is not believed to be richly endowed with natural resources.
11. There is also ongoing research in frontier areas such as fuel cells, exploitation of gas hydrates and improving (battery) storage, which are likely to impact the energy security in future. In this regard, I believe international cooperation could alter the calculus of energy security. Indian institutions are also involved in these projects and some of these institutions are here to take part in the dialogue between India and US. India is also a participating country like the US in the International Thermonuclear Experimental Reactor (ITER) project.
12. To conclude, I will say that energy security will remain a vital component of any government policy as availability of affordable energy has a direct impact on our economy and society. India is therefore watchful of all developments in this changing calculus, be it political, economic or scientific in nature in order to ensure energy security for the nation. And we are happy to embed our work in the context of international cooperation.