Oil Crisis: A View from USA

HN DasThe metal signboards all around the residence of the President of the United States of America has a single message. It ends with the following sentence: “While the Capitol represents the freedom and the ideals of the nation, the White House stands for the power and the statesmanship of the Chief Executive.”Standing in front of the White House on a June 2008 morning, I looked at the Capitol, at a distance, where the US Congress consisting of the Senate and the House of Representatives sits. The Congress is the legislative wing of the Republic. The executive business is conducted in the White House and another big building in its compound. The huge Treasury building, across the road and perpendicular to the White House, conducts the financial business of the Republic.Standing at that vantage point, I realized that the statesmanship mentioned in the above quotation referred to the innate qualities of the leader chosen by free and fair election among the citizens of the USA. But the President’s power is derived from the wealth and support of the nation.The USA is the wealthiest nation in the world. According to the World Bank’s estimates for 2005, the gross national income (GNI) of the USA was $12,969.6 billion against China’s $2,263.8 billion and India’s $793.0 billion. The USA, however, has only a small population of 296 million compared to China’s 1,305 million and India’s 1,095 million. Therefore, the per capita income of the USA was $43,740 against China’s $1,740 and India’s $720. The International Monetary Fund found that, in terms of purchasing power parity (PPP), the USA’s per capita wealth in 2007 was $143,727 against China’s $11,267 and India’s $6,613.This wealth has been accumulated during the past five centuries by the very hard, intelligent and dedicated work of generations of enlightened immigrants who came from a post-renaissance Europe. This has been enriched by a couple of generations of IT-savvy immigrants from Asia, especially from China and India, who came in the second half of the 20th century.This tremendous wealth, both physical and human, was the basis of the USA’s power. It used the wealth to help the Allies during the second world war, Europe in the reconstruction phase under the Marshal plan, and the poor countries either directly or through the World Bank. The USA derived international power after it joined the Allies in the Second World War, ending centuries of isolation.This great nation is now smitten by a gigantic crisis. As a result of the increase of crude oil price from $45 per barrel in 2004 to $143 in June 2008 in the international market, the gasoline price per gallon in the local market has quadrupled from less than $1 in 1999 to $4 in June 2008. This has let out an inflationary pressure which has engulfed the entire economy. Meanwhile, one of the worst recessions has thrown hundreds of thousands of workers out of job so that the unemployment rate has reached the record high of 5.5 per cent. The automobile industry is in doldrums. Thousands of vehicles remain unsold in the yards. Residential and commercial house holders are in a quandary because many are facing foreclosure of their mortgages. The trade deficit has increased sky high. The US Dollar has fallen in value in the international market. The oil producers are preferring to have their payments, and to hold their surplus, in other currencies, mainly in euro.Many experts predict that the American lifestyle, based on heavy consumption of gasoline and other oil products, is facing a deep crisis. Some predict an end of this lifestyle. One expert — Paul Swartz, Chairman of the Capital Region Energy Forum — even predicted an end of the Western civilization! (Times Union, Albany, New York, June 10, 2008). In this context it is necessary to go into the root causes of this crisis of crude oil price rise. Beside the demand supply mismatch, there are quite a few factors which exerted extraneous pressure on price in recent times. Iran, for example, is in a state of flux because of constant fear of war against Israel. Iran has 10 per cent of the world’s proven oil reserves. Its production was 6 million barrels of crude oil per day in 1974. This figure fell to 3.8 million barrels per day by 2006. This happened because ever “since the 1979 Iranian Revolution due to a combination of political unrest, war with Iraq, limited investment, US sanctions, and a high rate of natural decline”, the production has been falling. Recent outbursts of US President George Bush against Iran’s nuclear programme and additional sanctions by the USA and European countries aggravated the situation. Iran has curtailed production and increased the price of crude oil.Supply has been reduced due to a number of other factors. There has been a “peaking” of world oil production. “Peak oil” has been defined as “the point in time when the maximum rate of global petroleum production is reached, after which the rate of production enters terminal decline.” According to the International Energy Agency’s estimates, there has been a “pronounced loss of momentum in the growth of oil production during the last few years. After climbing from 82.90 million barrels per day (mb/d) in 2004 to 84.15 mb/d in 2005, output only increased to 84.80 mb/d in 2006 and then declined to 84.62 mb/d during the first ten months of 2007” (Earth Policy Institute, Lester R. Brown, “Beyond the Oil Peak”, November 15, 2007.)Demand, on the other hand, has been increasing tremendously. World population has increased so much that it is expected to become double between 1980 and 2030. People are becoming more oil dependent. In the rich countries demand for oil is increasing fast because people are consuming more, private transport is increasing, and there is some amount of hoarding too. In the USA, for example, 88 per cent of the workforce use private transport to go to work. Public transport has not developed at all. Beside hoarding by the oil companies, the US Government is maintaining a Strategic Petroleum Reserve of 727 million barrels at four sites in the gulf of Mexico in enormous salt caverns which have been converted to store crude oil.China has been consuming more and more oil to propel its unbelievable rate of economic development. The number of cars is increasing. Energy-intensive industries such as steel and aluminium are consuming more and more electricity generated from oil. All coal-based power plants in the Beijing area have been converted into oil based in order to reduce the level of pollution in that city ahead of the Olympics. China is feverishly buying crude oil in the international market for strategic purposes.One extraneous factor which is playing a sinister role is speculation. Hedge Fund operators and Wall Street bankers are pushing up crude oil price by their activities in the New York market. This probably prompted Morgan Stanley to predict that crude oil price will reach $150 by July 4,2008 — the US National Day.What is the solution? The US has the resilience to bring its economy back to track given the political will. It has more than sufficient oil reserves. Already there is a move to go in for offshore drilling which was earlier prohibited due to environmental reasons. The presumptive Republican Presidential candidate Senator John McCaine supported such drilling and claimed that the US has “untapped oil reserves of at least 21 billion barrels’’.(The Washington Post, June 17, 2008). President Bush seemed to agree. (The New York Times, June 18,2008). Beside that, the US has the largest known deposits of oil shale in the world, which is “enough to meet US demand for oil at current rates for 110 years” (Oil Reserves, Wikipedia). This means that the US can easily overcome the present oil crisis in a short time.The problem will be for countries like India where the entire development process may be stunted due to increase in price of crude oil and non-availability of sufficient oil resources. (The writer was Chief Secretary, Assam, during 1990-95)

source: sentinel assam

Move to speed up Gas Cracker Project work

From Kalyan Barooah

NEW DELHI, June 30 – In a bid to fasttrack the implementation of the mega Gas Cracker Project, a deadline of September 15 has been set for selection of licensors and financial closure. A crucial review meeting of the Project, chaired by Union Minister of State for Chemicals and Fertilizers, Bijoy Krishna Handique fixed the timetable for completion of the vital formalities. This came even as the Prime Minister’s Office has called for priority in selection of a full-fledged Managing Director and a Director of the Brahmaputra Crackers and Polymers Limited (BCPL).The selection process for the post of Managing Director is expected to take another six months, said the Minister, talking to this newspaper soon after the review meeting. Necessary papers for finalisation of the criteria, norms and qualifications have been forwarded to the Department of Public Enterprise, sources said. BPCL has already appointed a full-time chief operating officer and chief financial officer. Technical and the contracts and procurement teams have been formed. To expedite the clearance process, a sub-committee of the Board has been formed, sources said. However, the meeting at Shastri Bhavan today while reviewing the progress of the works noted with dismay the suspension of the fencing work following trouble at the work site. A Guwahati-based company was awarded the contract for the fencing works estimated to cost Rs 4 crore. Chairman-cum-Managing Director of GAIL, Dr UD Choubey had formally launched the commencement of fencing work on May 28. Following trouble between the company and local contractors, work has been suspended. The meeting today requested State Industries Commissioner, Ravi Kapoor to look into the issue and sort it out. The meeting was attended by officials of Gas Authority of India Limited (GAIL), Ministry of Chemicals and Fertilizers and Assam Government.Meanwhile, the Minister said a firm timetable for completion of formalities has been set. All work like floating of tenders and selection of technology and licensors would start in July. A deadline of September has been set by when all tenders would be awarded, he said.The two main tasks set out for completion include financial closure of BPCL and selection of licensor. The technology is to be selected by the licensor. There are three major players the world over.With the PMO closely monitoring the progress of the project, officials are under pressure to work on a schedule and complete the project within 60 months. Handiqe, meanwhile, said that he is not satisfied with the progress of the work and has impressed upon the officials to fast track the execution of the Project.The joint venture project among GAIL, Oil India Limited (OIL), Numaligarh Refinery Limited (NRL) and Assam Government is estimated to cost Rs 5,460 crore. The Government of India is shelling out a subsidy of Rs 2138 crore. The Prime Minister has laid the foundation stone of the project in April last year. source: assam tribune

Parleys with OPEC

Parleys with OPEC After that shocking statement (made over a week ago) that the government could do nothing about the inflation, Union Finance Minister P Chidambaram seems to have returned to terra firma in an effort to tackle galloping oil prices. On Sunday, the Finance Minister was in Jeddah, urging a meeting of the members of the Organization of Petroleum Exporting Countries (OPEC) to take a more rational stand on fixing crude oil prices. After all, petroleum prices have zoomed from just $50 a barrel only last August to around $135-150 now, thereby triggering off the worst inflation in 13 years in India and bucking similar inflationary trends all over the world. Chidambaram said that the only way to check sky-rocketing prices and the resulting inflation was for both consumers and producers to find common ground, adding that a price band mechanism would instil mutual confidence. ‘‘Consuming countries must guarantee that oil prices will not fall below an agreed level and producing countries must guarantee that oil prices will not rise above a guaranteed level,’’ he said at the ministerial segment of the Conference of Oil Producing and Consuming Countries in Jeddah that had been convened at Saudi Arabia's initiative to discuss what it said was an ‘‘unjustified rise’’ in prices of petroleum products. Chidambaram also called on oil-producing nations to re-assert their leadership in price formation and not remain passive spectators of speculation and paper trading in oil.One could not think of a more rational mode of arriving at fair prices for what nature provided as bounty to some countries but did not to many others. However, there is no accounting for human cupidity, whether individual or collective. And that perhaps is the foremost factor that has almost trebled crude oil prices in a span of just ten months. There were other possible reasons that we had referred to in an earlier editorial on the subject — like the desire of the Arab world to teach the United States a lesson for its illegal occupation of Iraq as also for consuming 75 per cent of the world's fossil fuel. We had also said that this business of OPEC trying to teach the US a lesson hurts all developing countries of the world, especially those that have no petroleum resources. What makes it all the more difficult to bear is that OPEC, which meets just about a third of the world's oil requirement, should be able to hold the world to ransom over oil prices. At the same time, what should make us thankful for small mercies is that Saudi Arabia, a front-ranking producer of oil, should not only have convened this conference on the recent rise in oil prices, but has said that the rise was unjustified. This is indication enough that some soul-searching is taking place even within OPEC. While these initiatives by India are timely, there is much else that needs to be done to ensure that we do not have to be at the mercy of OPEC for all times to come. As we said earlier, we need to develop and augment our own resources of petroleum products. This involves exploration of all the resources of oil in our own country, as well as bidding for oil producing blocks in Myanmar and other neighbouring countries that were deemed uneconomical earlier, but have ceased to be so now with oil prices having more than doubled. We must also get our scientists to start working frantically to find alternative sources of energy. And having done all this, we must address ourselves ruthlessly to the task of eliminating waste of energy from government establishments. After all, why should the public end up paying for what the government wastes? Source: sentinel assam editorial

Crisis in Numaligarh refinery

Crisis in Numaligarh refinery

— Subhas Chandra Goswami

Oil refineries are to purchase crude at international price whether it is imported or domestic product. The international price of crude at around 70 US dollars a barrel a year back has jumped to the present level of around 130 US dollars. October 19, 1889 is a red letter day in the annals of petroleum history, when the first gush of commercially viable oil was struck in Digboi well No. 1. But till independence of the country native people around took no interest in this industry. But after independence, specially after discovery of oil fields at Naharakatia, though the oil business was still controlled by the British, people started taking notice of the happenings around and slowly but surely started emotionally attracted to the oil industry. But construction of the first oil refinery under public sector at Barauni and laying of 1157 km long pipe line from Naharakatia to Barauni to carry Assam crude away from Assam was considered by the people of Assam as new form of exploitation. From then on ‘oil’ became emotionally sureharged word for the people of Assam and word ‘oil’ even today touches the inner cord of the people of Assam. It is a fact that the oil refineries at Guwahati and Bongaigaon came through agitation by the people of Assam. Even the last of the four refineries of Assam at Numaligarh is the outcome of an accord signed after a protracted agitation. Under this scenario the people of Assam are naturally concerned at the news of crisis of the “Accord Refinery”.What is the problem of Numaligarh refinery? In fact there are more than one problem faced by the refinery. Let us start with the availability of crude. Today total installed capacity of the four refineries of Assam is 7 MMTA. It we add 3 MMTA capacity of Barauni refinery, which was planned to run on Assam crude, the total production of crude from north eastern region should have been 10 MMTA. Perhaps this was the projection given by some people somewhere to justify the decision to build the fourth refinery at Numaligarh, when the actual crude production was about 5 MMTA at the time of signing the accord in 1995. Ironically the crude production of NE region presently has come down to about 4.5 MMTA. So when Barauni refinery is no more supplied with Assam crude from 2000, BRPL is bringing in RAVVA crude from Andhra Pradesh from 2003, the four Assam refinery including the one at Numaligarh are still short of 1MMTA for full capacity utilisation. As a result these refineries with total installed capacity of 7 MMTA are gasping for breath due to short supply of crude, when economy of scale demands that a modern refinery should have atleast 9 MMTA installed capacity to be economically viable. Did an element of pressure and emotion prevailed over economic consideration in taking vital decision in Assam oil sector?Oil refineries are to purchase crude at international price whether it is imported or domestic product. The international price of crude at around 70 US dollars a barrel a year back has jumped to the present level of around 130 US dollars. This has not only jeopardised the profitability of oil companies but also has put a great stress on the economy of the country, which is importing about 72 per cent of its crude oil need. Earlier even with shortage of crude supply, the Assam refineries did not incur loss due to the Government of India’s Administered Pricing Mechanism (APM) till 1998. The cost plus system also ensured the profitability of the refineries. However from early 1998 the Government of India had gradually dismantled the facilities given to the oil companies through APM and cost plus system. The Government of India did this with an objective to bring in market driven mechanism, because of policy business globalisation. In reality however it did not happen, because presently crude is priced at international level, whereas the product prices are controlled by the government. This is the paradox and this has created problem for oil companies, more so for small companies like NRL.To offset the problems the government allowed 100 per cent excise duty relief to NRL since its inception. However from 2002 refineries at Digboi, Guwahati and Bongaigaon also were offered 50 per cent excise duty relief and unfortunately for NRL, the excise duly relief on products of NRL also was curtailed to 5p per cent. Not we understand that Chief Minister Tarun Gogoi has taken up with the Prime Minister to restore the 100 per cent excise duty relief to NRL.For some years for crude oil supplied by ONGC and OIL to NE refineries, the pipeline transportation cost and Sales Tax were borne by ONGC and OIL. Now it is borne by the refineries. Because of the fact that for oil producing companies the steep rise in international crude price has come as a windall, the oil producing companies should be convinced to bear the cost of transportation of crude as they did earlier.The loss of public sector oil marketing companies like IOCL, BPCL and HPCL Offset to a great extent by the Central Government by offering 33.3 per cent discount 42.7 per cent loss is also offset by the Central Government by issuing oil bond. This however, affects cash flow. Though cash is not available, the taxes etc are to be paid on the accrued earning. These reliefs available to oil marketing companies till now are not available to NRL.In the changed scenario unable to sustain the growing losses without government assistance, Reliance and ESSAR have closed most of their retail outlets now. NRL, a Government of India undertaking has also decided to close down its retail outlets in a phased manner.Permission of Government of India was obtained by NRL in mid nineties to set up about 500 retail outlets across the country. The first few such outlets were set up around 2005. Today there are 108 outlets across the country. Now a question has arisen why after starting the marketing activities NRL got into trouble presently. In late nineties there was some instructions from Petroleum Ministry to BRPL also to start retail marketing activities by BRPL. After some preliminary works, for various reasons BRPL did not pursue with the retail marketing activities. During the period when NRL obtained permission from the government of India to start retail marketing activities, the scheme of issuing oil bonds to oil marketing companies was the ague. The NRL loving people of Assam have a right to known from NRL management as to whether NRL sought clarification from Ministry of Petroleum and Natural Gas on applicability of such bonds to their marketing operation before starting retail marketing business.The Chief Minister of Assam has already taken up with the Prime Minister to mitigate the crisis of NRL. He should relentlessly pursue the matter till the benefits given to other public sector oil marketing companies are available to NRL also. However we should not stop by looking at the problems of NRL in isolation. There are problems in oil sector in the North East. Considering low availability of crude oil in Assam, the small capacities of refineries, need of transportation of products through long distance due to inadequate local market, heavy investment needed by refineries to meet the new fuel standards, lack of any other major industry in the region, a comprehensive plan covering oil exploration, production, refining and marketing by the oil companies working in the region is the need of the hour to make oil business in NE meaningful and rewarding.(The writer is a former GM of BRPL) Source: Assam Tribune