AS a topic of discussion, energy is slowly catching up with cricket. This is good, because more and more people are no longer taking energy, or for that matter air or water, for granted. But we have also reached the stage where millions of people take load-shedding for granted, and millions more will remain deprived of commercial energy in their lifetime. The propositions that I wish to submit for your consideration focus on this reality, as well as on the opportunities to secure energy independence.

Proposition 1: For many reasons, and in many ways, diesel has become the mainstay of our economy. Goods transportation, whether by road or by rail, is almost entirely fuelled by diesel. Almost all captive power is generated from diesel. Whatever mechanization we have in agriculture is mostly powered by diesel. Nearly half of our total consumption of petroleum products is diesel, especially when the rampant adulteration of diesel by kerosene is factored in. In other words, a sizeable quantity of kerosene released through the public distribution system – estimates range from 30% upwards – is actually used as a substitute for diesel.

While kerosene adulteration suppresses the sales figures for diesel, wastage inflates the demand. Diesel is wasted because inefficient conversion due to obsolete engine technologies goes unchecked in India, and also because of indifference to or rather impossibility of conservation primarily because of bad roads. Any effort to optimize the demand for petroleum must, therefore, focus on diesel.

Globally, Easy Oil has been discovered, and Peak Oil has come and gone. Global oil supply will inexorably decline over time. The New Oil is coming from offshore discoveries in deep waters, at considerably higher risk and cost. The demand for Sweet Oil is climbing rapidly, driven by emission control limits for automobiles as well as refineries. Notwithstanding generally unrestricted supply of easy oil, the sweet-sour differential has escalated sharply.

 

On the other hand, the availability of renewable energy as a commercial substitute for gasoline and diesel lies at least a decade in the future. Economic growth, and aspirations for a better quality of life, cannot be throttled, waiting for the day when tens of millions of vehicles powered by renewables will displace buses, trucks, cars, scooters and auto-rickshaws running on gasoline, diesel and also kerosene as an adulterant.

So far we have talked about what we are not going to have. What we have is coal and lignite, and these we have in plenty, especially the reserves which lie beyond the reach of conventional mining techniques. There are several serious problems – relatively lower heat value and efficiency of conversion, high ash content, difficulties in transportation and disposal of residues. There are solutions to all these, but these do not look attractive in the context of ready availability of petroleum products at administratively controlled prices which bear no correlation to intrinsic values.

The proposition is that mass transit of goods and people be powered by electricity generated from coal gasification. Surface gasification technologies have improved to significantly reduce emissions. With underground gasification, the problem of ash disposal is eliminated, and in both cases the gaseous pollutants, primarily CO2, can be sequestered. Low pressure methane can be used for power generation with reasonably high efficiency using the IGCC route at the well-head or pit-head as the case may be. Underground gasification offers the additional advantages of complete conversion of coal into gas, eliminating the need to leave out considerable quantities in the conventional mining process.

Technologies for long distance power transmission with reduced loss are already being deployed on the national grid. What is not available is cost-competitive portable storage systems for electrical power. Therefore, mass transit systems have to be built on tracks. For inter-city movement, the railways have to be expanded and improved. For intra-city movement, the cheapest option will be to bring back the trams. Alternate options, requiring higher cost and longer lead time, are underground or elevated railways.

 

Why is this proposition so important and so urgent? We consume some 50 million tonnes of diesel every year. We are projecting 4% CARG in demand of petroleum products over this quarter-century. Against this, if kerosene adulteration is factored out, diesel demand should grow at 7 to 8% per year. Therefore, we are looking at annual demand of 100 million tonnes of diesel in say 10 years, depending on the trend in overall economic growth. Coal gasification to IGCC power generation to HVDC transmission to tracked transportation with clean, reliable, affordable electrical power is the only practicable solution with available technology in the near term. This solution will last for several centuries.

CBM will be an important input to this composite solution. As and when gas hydrate technology is mastered, this solution will be readily available for exploiting the new source. Major discoveries of natural gas are coming up on the East coast, and this is lean gas, i.e. almost entirely methane, to be used for power generation as the most economic option. The same will hold good, by and large, for trans-border gas inputs.

The cheapest of all these fuels will come from coal gasification, especially underground gasification of non-mineable coal and lignite. The state as the sovereign owner of the mineral resources should set only a token price and zero tariff on non-mineable coal and lignite so that the required investments in gasification, generation, transmission and utilization yield market-oriented returns.

The single major bottleneck in implementation of this proposition for Gas-powered Mass Transportation System (GMTS) is that the turf is divided among several ministries of the Government of India. CBM development, to cite but one example, was held up for several years because of one such turf war.

What do we get from GMTS? We get safe, clean, reliable transport capacity to cater to hundreds of millions of tonnes of freight and tens of millions of people on a 24x7 basis, for centuries to come. We also cut costs and pollution by eliminating the need for captive generation on a mass scale.

What happens if we discard GMTS as a pipe-dream? We will go from choked roads and choked ports to a choked economy, with the associated risk of choking up the aspirations of the people.

 

Proposition 2: The second proposition is a brief one. This is a set of three postulates, derived from our national experience, even global experience: first, controls beget shortages; second, shortages beget controls; and finally, controls beget corruption.

To secure energy tomorrow, the controls must be swept out, and then, kept out. Investments in energy, whether by the public or by the private sector, must be subject to regulation, as distinct from control. The regulation must be focused on clearly defined areas of environmental protection, occupational health and safety, competitiveness, common access and free choice to customers. We must recognize the fact that markets are driven by money, not by minutes of meetings on micro-management.

 

Proposition 3: The earth’s resources are unevenly distributed across geographies. Therefore, some countries have oil and gas to sell, and some countries need to buy them.

A sale is an exchange of value out of free choice. The ability to supply is not necessarily an overwhelming strength. The need to buy, backed by the ability to pay, is an equally powerful strength. This is important because we tend to think that the need to import oil and gas is a national weakness.

In India, we have less than 0.5% of the globally prognosticated hydrocarbon resources. We have more than 15% of the global population. The per capita oil and gas consumption in India is one-third of the global average. Every kilogram increase in the per capita consumption requires more than a billion kilogram, in absolute numbers. In the first instance, to step up our per capita consumption to the global average level, we will require an additional 300 billion kg of oil and gas per year. Subsequently, we will have to raise our per capita consumption to the level of developed country’s average, adjusting for their exploitative use of resources.

So, we have to import. There are countries with 100% import dependence for oil and gas, which sustain their thriving economies, much ahead of us. There are also countries with exportable surplus of oil and gas, which are mired in poverty, much worse off than us. Therefore, we must draw strength from our ability to pay, and our record of never defaulting in payment.

The countries with oil and gas to export need investments, technology and skills to get the resources ready for delivery. The mere presence of oil and gas below the surface does not generate any income; second, all these countries are aware of the fact that this is a one-time resource, and that exploitation must be calibrated to provide for future generations as well. Equally, all the resources in all such countries do not have the same value, because value depends on quality, timing and mutual confidence.

For the buyer countries, buying is only the first step. Investments, technology and skills are required to process and to consume the oil and gas. Such investments will materialise only on the basis of quality, price and assurance of supply through take-or-pay contracts at each link of the supply chain. This is the globally-established paradigm, and without effective risk-mitigation, such schemes will not be financed. Above all, geopolitics influence all such long-term transactions, in terms of price, technology and finance.

 

We need to maximise domestic production within a strategic context of retaining an ability to meet future contingencies. We need to acquire equity oil and gas overseas, and establish an efficient framework for shipping and trading. We need to enter into long-term sourcing contracts at reasonable prices, with secured reliability of the seller to produce and deliver. We need to pursue all these vectors simultaneously.

When it comes to long-term sourcing contracts, we must proceed on the basis that in the given realities of geography and politics, the sellers need us as much, if not more than we need them. If the sellers cite their national policies to force conditionalities, we must reject such conditionalities on the basis of our national imperatives. If we want multiple sourcing for strategic flexibility, the sellers also want multiple supply options. The dollar remains green, irrespective of who pays and who receives.

 

Therefore, the proposition is that long-term sourcing contracts must begin from security of production at the fields, and continue with security of delivery along the supply chain so that the investments in processing and consumption are secured. Second, pricing has to be set at a reasonable mean of the need to buy and the need to sell; the buyer is the boss, a statement also known as the customer is the king. Finally, the transactions must address all issues from the field to the furnace in a comprehensive manner. We need to act fast, but remember that undue hurry dilutes negotiating leverage.

Such a strategy will require coordinated, preferably unified management of all energy options. Energy independence for India will come from coal, water, thorium, renewables and indigenous as well as imported oil and gas. For oil and gas we will remain a net importer till global reserves run out, in techno-economic terms, in a generation or two. But given the other resources that we have, we may become net exporters of energy for generations beyond.

For securing energy tomorrow we need the energy of Indian entrepreneurship. Let us unleash the business of energy.

 

* Based on the Lovraj Kumar Memorial Lecture, 2005. The propositions are the personal views of the author, and do not constitute an official statement of the ONGC Group of Companies.