With regard to this, India had already submitted its action plan and promised to reduce its emissions in the Intended Nationally Determined Contributions, INDC before the Paris conference in December 2015. 130 countries including India had submitted their action plans in the official languages for which they were to be held accountable. (Sinha, 2015)

What is the One Nation One Grid Gas Project?

The Narendra Modi government has strongly focussed on creating a self-sufficient economy for India- Atmanirbhar Bharat. The one nation one grid gas project is another important attempt of the government to take a step closer towards Atmanirbhar Bharat. The government has planned to expand the national gas pipeline network from 16500km to 27000km. The government is aiming to increase the share of natural gas to 15 percent in the primary energy basket by 2030. The current share of natural gas in the primary energy basket is 6.2 percent which is considerably a low amount considering the demand for energy fuel in the country. (One Nation One Gas Grid: Betting Big on Infrastructural Development, 2021)

Prime Minister Narendra Modi has introduced a 450km natural gas pipeline in Kochi-Mangalore as a step towards making India self-reliant. The 450km gas pipeline cost INR 3000cr. The power and energy sector infrastructure is due to an upliftment for decades together. This initiative can lead to a positive impact on the economic development of the nation and cater to the ever-rising demand for the energy and power generation sector. It is also looked upon as an important step towards improving the standard of living of the people along with reducing their expenses. The gas pipeline network will provide eco-friendly Piped Natural Gas (PNG) to the households. This has the potential to improve the energy infrastructure by manifolds within a few years. (One Nation One Gas Grid: Betting Big on Infrastructural Development, 2021)

Need for the One Nation One Gas Grid Project

The most important aspect to put into perspective is that India is one of the highest emitters of greenhouse gases in the world. It is therefore high time to realise the impact it has on the world’s environment and the disaster that it could create if not worked upon at the right time. There has already been a delay in understanding and taking a step towards correcting our ways. But nevertheless, the one nation one grid gas is perhaps a very positive step taken by the government to help shift India towards a more sustainable choice.

Secondly, India’s growing population demands a better energy infrastructure to deal with the simultaneously growing demand for natural gas at a reasonable rate. The one nation one grid gas project is therefore needed to supply energy produced from natural gas via a single source. It is important to connect the different regions of the country with a single source of energy. Third, the transition towards completely clean energy or solar energy country is one that will take time and the one nation one gas grid can act as a transition fuel towards clean energy. Thus, if the one nation one grid gas project turns out to be a success, there will be only one power frequency across the nation. (RSTV: THE BIG PICTURE- ONE NATION, ONE GAS GRID, 2021)

One Nation One Grid Gas – India’s Renewable Energy Journey

The Minister of Petroleum and Natural gas and Steel, Mr Dharmendra Pradhan had called for foreign investors and developers to invest in India’s renewable energy sector. In his speech at the third RE-INVEST conference, he talked about how India is now one of the most favoured destinations to invest in the renewable energy sector and that the sector has seen an interesting turn of events. According to an official statement issued by the Ministry of Petroleum and Natural Gas, India has seen an investment of over USD 64 billion in the last 6 years. (ANI, 2020)

The Union Minister also mentioned that India has a very liberal policy for FDI when it comes to renewables. The investors can invest on their own or enter into joint ventures for technical or financial collaborations. The ease of doing business was also brought up and was mentioned that safeguarding investments was a top priority. Adequate measures are being taken to safeguard the businesses that are affected due to the covid-19. (ANI, 2020)

Minister Pradhan also said that India is going through a transformative change and that the nation’s energy agenda is climate-sensitive and market-based. It was also mentioned that the vast natural gas pipeline network will open a vast range of opportunities in terms of investment and employment. He called for participants to look into investment opportunities in the Compressed Biogas initiative. (ANI, 2020)

Even though the pandemic has slowed down the economic pace, India is looking forward to transforming into a sustainably rich country with equitable outcomes for every region. 

Conclusion- A Way Forward

The one nation one grid gas initiative taken by the government requires rigorous maintenance of the policy regime in order to attract the right amount of investments for the sector. As complicated as the policy looks, it will only get more difficult to cater to the demand for such a huge population along with infrastructural requirements. There is also a need to educate and create awareness about natural gas among the people in order to make this project a success. The one nation one grid gas project has the potential to create large-scale employment along with a sustainable choice of living. 

References

ANI. (2020). Pradhan invites foreign developers, investors to be part of India’s renewable energy journey. ANI.

One Nation One Gas Grid: Betting Big on Infrastructural Development. (2021). Wire and Cable India (WCI).

RSTV: THE BIG PICTURE- ONE NATION, ONE GAS GRID. (2021). Insights Editor.

Sinha, A. (2015). India promises to cut greenhouse gas emissions intensity by 2030. The Indian Express.

Tandon, T. (2020). One Nation One Grid Energy Initiative: India paves it’s way ahead. Jagran Josh.

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Despite knowing the advantages and the need for renewable energy why are we still heavily dependent on fossil fuels? It’s because, despite all the advantages offered by renewable energy, there are several challenges to expanding their usage. The problems range from issues of accessibility, lack of technological know-how and financial risks, to the various domestic and international game of power and politics.

In the face of all this, countries and other organisations need to come together to ensure the availability and accessibility of clean and green energy. The International Solar Alliance (ISA) is one such alliance, which can prove to be a major boon for the globe as a whole, and the developing countries in particular.

Background

The International Solar Alliance (ISA) is a treaty-based intergovernmental organisation. The alliance was launched by India’s PM Narendra Modi, along with the former President of France, François Hollande in the COP-21 in Paris in 2015. The International Solar Alliance was launched as a coalition of “sunshine countries”. These are solar resource rich countries which lie completely or partly between the Tropic of Cancer and the Tropic of Capricorn. In 2018, the ISA was opened to all the Member States of the United Nations to join in order to expand the membership beyond the Tropics.

The International Solar Alliance aims to create a “multi-stakeholder ecosystem where sovereign nations, multilateral organizations, industry, policymakers and innovators work in together to promote the common and shared goal of meeting energy demands of a secure & sustainable world”.

Main Objectives of the International Solar Alliance

Conforming to the Framework Agreement of the International Solar Alliance, the main interests and objectives are:

• Address the common key challenges in order to obtain maximum use of solar energy applications and reduce the dependability on traditional non-renewable energy sources.
• To take coordinated action through programmes and activities launched on a voluntary basis, aimed at better harmonization, aggregation of demand, risk and resources, for promoting solar finance, solar technologies, innovation, R&D, capacity building etc.
• Reduce the cost and risk of finance to increase investments in solar energy in member countries by promoting innovative financial mechanisms and mobilizing finance from institutions. Furthermore, the alliance aims to mobilize investments of USD 1 trillion by 2030.
• Facilitate collaborative research and development (R&D) activities in solar energy technologies among member countries. This objective aims to reduce the gap in terms of knowledge and training, especially in developing countries. One of the major projects in this field is supported by the Indian government. The Government of India has been supporting the International Solar Alliance by providing training to master trainers in the field of solar energy through the Indian Technical and Economic Cooperation (ITEC) Scheme. The duration of the training is 21 days and all costs are borne by the Government of India.
• Promote a common cyber platform for networking, cooperation and exchange of ideas among member countries. The alliance has a 24×7 Solar Cyber Centre. There is also the International Solar Alliance Infopedia Portal which is accessible to everyone for information regarding the use and promotion of solar energy.

Through these objectives, the International Solar Alliance aims to achieve international collaboration and sharing of sustainable energy source by 2030.

Geopolitical Significance of the International Solar Alliance

The energy sector in general, and the concentration of oil in particular, plays a major role in the international geopolitical scenario. The power hold of Western Asia and the USA is the perfect example. Thus, a shift towards renewable energy can also reconfigure world politics.

In terms of international politics, organisations like the ISA can play vital roles. Apart from the goal of achieving clean and sustainable energy, the organisation reflects the leadership capacity of India and emphasises on the rise of India as a major player in international politics. Furthermore, having both the developed and developing nations as its members, and providing representation to countries like Fiji and South Sudan, the organisation has the potential to reduce the gap between the global “north” and global “south”.

The possession of oil reserves by the West Asian countries and the USA, as discussed above, gives them a great deal of power which is used to compel or manipulate the domestic matters of many states. The International Solar Alliance’s aim to provide solar energy will ultimately help countries to challenge the monopoly of the current oil-rich nations. The alliance also aims to bring various joint co-operations among member nations, and also with other organisations. Steps like these will strengthen the trans-regional solidarity in the international arena.

Latest Developments

The International Solar Alliance held its Third Assembly virtually in October 2020. India and France were re-elected as the president and co-president respectively. Apart from that, vice presidents were also chosen to represent the four regions of the International Solar Alliance. The meeting also saw discussions about the ongoing projects, new initiatives and programmes, mobilisation of future investments and the various challenges. One major highlight of the assembly was the setting up of ISA CARES in the wake of a global pandemic. This initiative was launched with the objective of deployment of solar energy in the healthcare sector in LDC/SIDS ISA member countries.

Conclusion

The International Solar Alliance is seen as a major foreign policy tool for India. It is also viewed as an attempt to counter China’s One Belt One Road initiative. The organisation as an initiative of India shows a great deal of potential in the present times when there is a growing need to provide clean energy. Another important aspect of the International Solar Alliance is its trans-regional nature. It has members from around the globe. However, the success of ISA will depend on how it tackles the many challenges that the renewable energy sector has faced in the past and how it achieves the vision of “One Sun, One World, One Grid”.

Treaties, friendships and alliances have always been an important part of world history and politics. The ongoing Covid pandemic has taught us the importance of solidarity. In times like these, the International Solar Alliance can manifest into a far greater body, providing not only green energy but also aiding its member countries in times of needs.

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The Company’s shares began trading on the Tadawul stock exchange on 11 December 2019. The shares rose to 35.2 riyals, giving it a $1.88 trillion market capitalization, and reached the $2 trillion mark on the second day of trading.

Global Positioning

Being a major supplier of oil globally, the company holds a special value in the global supply market. Hence, disruptions in the production process or any other hindrance impacts the global economy as a whole. Saudi Aramco has been attacked twice in the last decade. The 2012 cyber-attack involved several computer systems of the company being hacked. Yet again in 2019, another event took place.

Saudi pipelines, oil installations, and tankers had occasionally been attacked over the past two years, but analysts say what happened in eastern Saudi Arabia in the early hours of Saturday morning is a much larger escalation: a hit to the jugular of the kingdom’s oil industry. At 3.31 am and 3.42 am on Saturday, loud explosions erupted at Khurais oilfield and Abqaiq processing facility, both owned by Saudi Aramco, the country’s state-owned oil company, often described as the kingdom’s crown jewel. The explosions set off fires that took several hours to douse and appear to have caused significant damage. Saudi oil ministry sources said the production had been disrupted by about 5m barrels a day – nearly half the kingdom’s estimated output of 9.7m barrels and 5% of global production.

Economic Implication

Saudi Aramco lost on its a huge portion of crude oil supplies due to the attacks. Eventually, the supply side of the oil market’s demand-supply mechanism changed. With limited oil refining and other activities, the supply decreased keeping the demand the same or slightly increased. These actions led to a new equilibrium where the prices of oil surged with a rise in the stock prices. Eventually, the stocks became overvalued shaking the financial markets with the soaring high prices of oil. The price of a Brent oil rose to almost $72 (£58, up from $60 an oil) by 20 percent early on Monday. That’s a massive jump — the biggest step since the 1980s contract was established.

It then fell down to around $66 a barrel after Donald Trump vowed to unleash some of America’s oil reserves, to make up for Saudi Arabia’s deficit. That’s a two-month record, 10 percent more than Friday night.  Higher oil prices have the potential to pull global growth. It pushes up transportation costs and petroleum-based goods prices. That fuels inflation, leaving less disposable income for consumers.

With appropriate measures and repairs, the oil supply was brought back to normal.

Impact of COVID & Price War with Russia on Oil Prices

With the advent of COVID-19, Saudi Aramco has faced another challenge with profits plunging more than 50% than expected in the first and second quarters. To understand the impact, we again need to consider the demand and supply mechanism. The major demand for oil is from the transportation sectors, business closures, domestic and international travel that kept on declining due to lockdown. This immensely declined the demand, shifting it inwards. A sharp decline in domestic consumption and a possible decline in new investments, declines in tourism and business travel, the spillover of weaker demand to other sectors and economies through trade and production linkages, supply-side disruptions to production and trade, and shifts in healthcare expenditure are just some of the channels through which the pandemic affects the demand side in the market.

Responding to this, Saudi Arabia decided to reduce the supply of oil so as to keep the prices at a moderate level. The proposal was although refused by the Russian’s and what followed was a price war. Saudi Arabia entered a price war with Russia on 8 March 2020, encouraging a 65 percent quarterly decline in oil prices. In the first few weeks of March, US oil prices plummeted by 34 percent, crude oil dropped by 26 percent, and Brent oil dropped by 24 percent. In the aftermath of the COVID-19 pandemic, the price war was caused by a break-up in the dialogue between the (OPEC) and Russia over potential cutbacks in oil supply. Russia walked out of the agreement and the OPEC alliance collapsed. Oil prices had already declined by 30% due to the reduced demand, but with the price war, the result came out to be a global stock market crash.

Saudi Arabia and Russia agreed to slash oil supply in early April 2020, and again in June 2020. On April 20, the price became negative. It should be noted that oil production can be slowed down but not totally halted, and even the lowest possible level of production resulted in higher supply than demand; those holding oil futures became willing to pay to offload contracts for oil they expected to be unable to store.

Current Scenario and Investment Prospects

Lockdowns were lifted in some of the countries including Saudi Arabia in June along with a set of instructions to be considered and followed. Thus Saudi Aramco has seen considerable growth after the oil price crash and managed to earn considerable profits but less than expected. As a result, Saudi Aramco has been reviewing its plans to expand at home and abroad in the face of sharply low oil prices and a heavy dividend burden.

One of the projects that are likely to face the axe or the pause button from the oil major may be its proposed investment in a $44 billion mega refinery project at Ratnagiri in Maharashtra. It is a 50:50 partnership between state-run Indian oil companies and Aramco. It would either exit the investment or would review it again once the market improves, putting it at a halt for the time being. However, Sources said Aramco has already made its stance known on refinery investments in China and a Texas, USA factory. It is also slowing on its planned investments in Pakistan. In India too, the privatization proposal for state-owned refiner BPCL has been delayed by three times so far, in the absence of any firm investment pledge from Saudi Aramco and other investors.

However, it is still working on the $15 billion stakes in Reliance Industries Ltd.’s refining and chemicals business, although lower oil prices are forcing it to slash investment spending. A deal with Reliance would help Aramco join the ranks of top oil refiners and chemical manufacturers. Aramco is already a major crude supplier to India while Reliance sells petroleum products to the kingdom, including gasoline.  The Reliance transaction will help Aramco achieve its target of more than doubling its refining capacity to between 8 million and 10 million barrels per day; At the end of last year, the Saudi corporation had a refining capacity of 3.6 million barrels per day, including wholly-owned plants and joint venture holdings. The gross capacity of the facilities with stakes in Aramco was 6.4 million barrels per day.

State oil company Saudi Aramco has discovered two new oil and gas fields in the northern regions, the kingdom’s energy minister said on Sunday, state news agency SPA reported. The fields haven’t been pinpointed as of now but are already producing oil, condensates, and gas. The two new fields have the potential to contribute to its non-hydrocarbon oil. The Kingdom has been striving for the same as an important aspect of its diversification efforts. A lot of the oil provided by Aramco is used locally for power production, and the business — and the government — are trying to minimize this by replacing gas oil. Moreover, this would also ensure that oil is freed up for exports, leading to an even better dominance over other nations as well.

Conclusion

The Saudi Arabian Oil Company plays an integral part in the world economy as a major supplier and producer of petroleum and its products, natural gas, and crude oil. Amongst many other companies and even countries, Aramco seems to have stabilized quite well considering the aftermath of several incidents that completely changed the market scenario. Moreover, Saudi Arabia relies heavily on its oil and petroleum industries as they are a major source of their income. Hence, how Aramco performs reflects directly on the country’s economy.

Despite the concerns regarding the oil market, analysts predicted that Aramco was better prepared to weather market volatility, owing to its size and scale, its low production cost, and solid free cash flow generation in a weak oil price environment. This is good news for its investment plan for Asia.

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Oil Price War Explained

Well, it all started with the Russia-Saudi oil price war 2020. Behind this was an effective collapse of an agreement between OPEC and Russia to enact production cuts to support the market. Saudi Arabia, OPEC’s de facto leader, wanted deeper and more prolonged cuts to counter the effect of the spread of coronavirus on demand. The International energy agency said that oil consumption is expected to contract this year by 1.5 million barrels per day for the first time since 2009.

Despite this Russia refused the OPEC decision, believing the bigger cuts in production would only propel rival US shale producers. In response, on 8 March 2020, Saudi Arabia launched an oil price war after Russia deal to collapse. Even as the world requires less oil from global producers, the kingdom said it would put 2.6 million barrels a day into the oil market. This triggered a tit-for-tat response from rivals. Russia said it would add more oil into the market and so did the UAE. The UAE announced an increase in production to 4 million barrels per day, higher than the country’s estimated output capacity of 3.5 million bpd.

Aftermath

It’s the first time since the 1930s that we’re seeing such a severe demand shock now combined with a supply shock facilitating  65% quarterly fall in the price of oil. Since the beginning of the price war consumption fell drastically due to depressed demand and insufficient storage mainly because of coronavirus pandemic.

Saudi Aramco announced a cut in capital expenditures from $35–40 billion planned to $25–30 billion. Iraqi and Kuwaiti oil producers also announced price discounts to their buyers, though Iraq’s discount was lower than that of Saudi Arabia’s. The US-based company, Whiting Petroleum Corporation, which produced 120,000 barrels per day, was the first major producer to declare bankruptcy due to the oil price crash. The oil price war is one of the major causes and effects of the currently ongoing global stock-market crash. Norway, Europe’s largest oil exporter, saw a drop in its currency to historic lows against the Euro (source).

In terms of India…

World Bank says Remittances will plunge by more $100bn. This will bite hard as FDI is set to fall 35%, equity & debt flows are expected to fall 80% to low and middle-income countries. India will be hit too especially with flows from the Gulf drying up. India’s remittances are estimated to fall ~23% to $64 bn in 2020.

However, in Russia Saudi oil price war, India can be a big winner by taking advantage of the fall in oil prices and can stock its reserves. India has a storage capacity of 39 million barrels, China’s total capacity is at 550 million barrels and Japan’s at 528 million barrels, ensuring a supply of over 190 days in the event of a supply disruption. If India can increase its storage capacity, then it can be a very good deal for India. 

One more advantage Indian Markets can demonstrate i.e, in the area of Bonds. Still, compared to the Global Markets, Bond yield in India is comparatively attractive. With TLTRO 2.0, Corporates like RIL, NHPC have started issuing bonds. This can be an attractive opportunity for FIIs to capitalize.

On 9 April, OPEC and Russia’s historic deal marks the end of the oil price war by agreeing to reduce the oil production by 10 million BPD to boost the price and let the market forces get stable.

In future, the crude oil prices are expected to make more new lows as long as this global pandemic continues.

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The US has been importing crude oil from 1915-1932. But the country was still a “net exporter” because the export of refined products exceeded the crude oil imports. But after the second world war, the US consumption outpaced production again and in 1947 they became a “net importer” again. Until 1955 the US produced more than 50% of the world’s entire oil production. And until 1964 they remained the largest oil producer, but then the Middle East took over. At around 1984 the US oil production was about 18% of the total world production.

The oil industry: Recent history & OPEC

In 1950 the Middle East produced around 1.8 million barrels of oil per day (mmbbl/d), that was about 17% of the world’s production. And this increased to 5.2 mmbbl/d in 1960, by then around 24% of the world production. To protect its own oil industry, the US introduced mandatory import quotas which limited the imports of the Middle East crude oil. This kept the oil price in the US sort of constant, but “non-US crude oil” decreased in value since a major part of their market (the US) was inaccessible due to the quotas.

And as an answer to this, the OPEC (Organisation of Petroleum Exporting Countries) was formed in 1960 by 5 major oil-exporting countries: Venezuela, Kuwait, Saudi Arabia, Iran and Iraq.

In 1970 the US relaxed its import quotas. And after the Yom Kippur war of 1973, in which the price of oil went up significantly, the developments in oil prices were relatively stable after 1974. Oil prices where high and this made it attractive to explore and develop oil areas that were not of economic interest in the past. As a result, major investments were made in new oil areas in Alaska, Mexico and the North Sea. And these areas started to produce oil by the end of the 70s. This resulted again in a large decrease in OPEC production after 1977 as a result of these new areas. Btw, OPEC produced in 1977 the high amount of 31.3 mmbbl/d.

Concerning oil prices, the Iranian Revolution drove the spot price of OPEC oil to 25 USD bbl in 1979. And this resulted in another round of oil price increases to over 40 USD bbl. But these price increases were poorly timed because world demand was falling and many new oil fields outside OPEC were getting more and more operational. Then mild winters in 1982 and 1982 in Western Europe resulted in even more oversupply, and oil-importing countries did not need to buy the expensive OPEC oil anymore. This resulted in that OPEC production was about 15 mmbbl/d in 1985, less than half of its production in 1977 (31.3 mmbbl/d, as mentioned). This had a severe effect on oil prices, and when in 1986 OPEC production went to 18 mmbbl/d the price collapsed to below 10 USD bbl. And since 1986 OPEC attempts to maintain the oil price at the level of the full cost of non-OPEC supply.

The oil companies: Standard Oil

Most of the big oil companies had their origins in the US when the “Drake Oil Field” was found in 1859 in Pennsylvania. The first big company formed was then “Standard Oil” with the financing of John D. Rockefeller. By the end of the 1870s, over 90% of all kerosene was passing through standard oil’s facilities. The company got so big that the whole company “Standard Oil Trust”; consisting out of Standard Oil New Jersey, Standard Oil Ohio etc. etc., needed to be divided. The US supreme court ordered this in 1911.

And the main oil companies as we know (knew) them were formed out of Standard Oil:

• Standard Oil of New Jersey became: Exxon;
• Standard Oil of New York became: Mobil (before merger Exxon);
• Standard Oil of California became: Chevron;
• Standard Oil of Ohio became: Sohio (before taken over by BP);
• Standard Oil of Indiana became: Amoco (before taken over by BP);
• Continental Oil became: Conoco;
• Atlantic Oil became: Sun Oil.

The oil companies: Royal Dutch & Shell Group

Despite early US dominance of the oil industry, there was another major player at the beginning of the 1900s.

The company was Royal Dutch Shell with a background in two companies:

• Royal Dutch;
• Shell Transport & Trading.

Shell Transport & Trading was set up late 1800 by Marcus Samuel, and the company transported kerosene in large quantities to the far eastern market. And Royal Dutch had its origins in the “Dutch East Indies” where for several years oil seepages had been reported. By 1892 Royal Dutch was producing oil with a crazy growth (sixfold increase) in only two years of time. By around 1900 there were takeover attempts of Standard Oil. And in order to resist this Royal Dutch and Shell Transport & Trading merged in 1907. So at the time of this merger in 1907, the oil market was dominated by Standard Oil and Royal Dutch Shell.

In the next blog in this sequence, I will continue by talking about the other companies in the oil industry. And I will discuss oil reserves and production.

And later all the other aspects of valuating these oil companies will be discussed in this sequence of blogs:

• The market for oil;
• Accounting issues for oil companies;
• Valuating “Oil exploration and production companies”;
• Valuating “Integrated oil companies”.

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