Opinion Vikram Mehta writes: India’s fossil fuel lessons for net zero

There are four relevant learnings.

First, the liberalisation of upstream petroleum did not bridge the gap between the domestic demand for petroleum and indigenous supply. On the contrary, the gap has widened. There are many reasons for this but the one that has relevance for clean energy is it is not enough to have raw materials. The surrounding economic, technical and operating ecosystem must enable their conversion into commercially-useful products. India has the raw material of oil and gas. That is a geological fact. But what it does not have are the enabling conditions to monetise them. The bulk of its hydrocarbon resources are located in harsh terrain and complex geology. They are, therefore, difficult to locate and even when located they are difficult to produce on a commercial basis. This is because of the high cost of drilling and development. In consequence, a large percentage of discovered hydrocarbons have not been produced.

Transposed onto the clean energy sector, the learning is: Do not presume that the availability of technical talent and capital will be enough to create a world-class hub for the manufacture of batteries, solar cells, wafers and modules. The system will also have to minimise the avoidable costs associated with procedural red tape — land acquisition, erratic supplies of water and power and legal redress.

Second, the recovery rate of oil and gas from India’s producing fields has averaged between 25-30 per cent. This means that for every 100 molecules discovered, only 25-30 have been brought to the surface. The recovery rate of fields of comparable geology across the world is between 40-60 per cent. The reason for this difference is not access to Enhanced oil recovery ( EOR ) technologies. These are available mostly off the shelf. The reason is the utilisation of these technologies. These have not been efficiently implemented.

The learning here is that the clean energy sector must not presume that technology is in of itself the sine qua non for manufacturing competitiveness. It has to be efficiently utilised. China’s dominance of the clean energy value chain — 90 per cent of the global market share in silicon wafers; 85 per cent in PV solar cells, and 80 per cent in PV solar modules — is because its process engineers have perfected the implementation of the several technological steps required to convert raw material into end product. Our engineers will have to achieve similar levels of implementation efficiency.

Third, the liberalisation of EP triggered the expectation there would be a flood of investor interest. This did not happen because international companies regarded our geology as high risk and because they did not think our fiscal and commercial terms were internationally competitive. Their response to the invitation to bid for exploration licences was muted.

A similar disappointment might befall those who believe the PLI scheme has created the condition for international investor interest. This is because the incentives offered are small compared to the benefits provided by the US through the “inflation reduction act” and Europe through its “net zero industry act”. The US offers, for instance, subsidies up to $10 billion — the total amount allocated to PLI — for single factories.

The learning here is India cannot compete on the size of the incentive package. And nor should it. The endeavour should instead be to lower entry barriers, ease business conditions and remove the perception that India offers a high-cost operating environment

Finally, as indicated, India remains dependent on the external market for supplies of petroleum. There is no geological magic wand by which to reverse this imbalance and address its vulnerability to unexpected supply disruptions. The question is how serious is this vulnerability. Does this dependence warrant pricing at a strategic premium to secure self-sufficiency? My answer is it is a concern but given that oil is tradeable and there are multiple sources of supply, it is less of a concern today than when the Middle East had a stranglehold over supplies. Further, the government has in recent years adeptly secured supplies without getting embroiled in domestic or regional politics and conflicts. All this gives me confidence that a strategic premium is not warranted. And that self-reliance does not have to be built on the bedrock of self-sufficiency.

The lesson for the clean energy sector is two-fold. One, like oil, clean energy minerals and components are internationally traded. There can be purchased on the international market. The country should desist therefore from building a high-cost, domestic, clean energy hub that is forever dependent on subsidies. And two, given that China is the lowest-cost supplier of clean energy components, India should continue with its two-track policy. One track will pit us eye-ball-to-eye-ball on the border, the other should strengthen our trading relationship.

Professor Graham Allison has referred to this contradictory relationship in the context of US-China as “rivalry partnership”. He credits Sun Tzu who wrote in The Art of War 1,000 years ago that “the people of Wu and Yue were mutual enemies but when they sailed on the same boats and encountered a storm, they helped each other like left and right hands”. India and China face the storm of global warming. Perhaps they can help each other meet their net-zero carbon obligations.

The writer is chairman and distinguished fellow, Centre for Social and Economic Progress