Mr. Amit Bhandari, in his article “A sovereign wealth fund for oil security” published in the Financial Express on February 1, 2022 suggests that despite the push for renewable energy and electric vehicles, the world will still be dependent on oil, natural gas and coal to fulfil its energy requirements. He suggests that for India to secure its oil and gas supplies, it needs to invest in countries like the US, Canada and Australia, through acquiring minority stakes in listed oil companies rather than operating its own oil fields. Mr. Bhandari also suggests that a sovereign wealth fund be set up for such investments to be made.
Before getting to the issue of a sovereign wealth fund, we believe that it is necessary that the country relook at its energy needs itself. Firstly, energy is not equitably distributed among the population with rural areas being energy poor as compared to urban areas. Even among urban areas, there is a difference in energy consumption between metropolises and other urban formations. Additionally, class determines which localities in the cities receive how much of the energy available to the city. These privileged urban spaces and localities receive uninterrupted energy supply in the form of piped gas and uninterrupted power supply. Importantly, industry is far more energy intensive than the domestic sector.
Secondly, if the economy continues to be growth focussed the way it is today, with little to no concern for the environment and the climate, there will be an ultimate impact on people by impacting livelihoods especially of those dependent on primary occupations like farming and fishing; and life especially of those living along the coasts and in the forests, hills and mountains. Therefore, the concern is not only about where India will be able to fulfil its energy requirements but how much energy should India be consuming. Finally, without a reduction in energy consumption and therefore oil & gas in India, the country will not be able to deliver its commitments towards mitigating the climate crisis.
This will require a paradigm shift in the way we run our economy and can only be achieved by a synchronous action by Union and State Governments. This shift includes moving away from ecologically destructive and towards socially productive sectors like education, health etc. Moving away from ecologically destructive development would entail reduction of energy use and fossil fuel based development. Therefore, unless there is a serious reduction of consumption, there will not be enough oil despite investing in oil companies, or acquiring it. Oil is a sunset industry, and investments in that as a long term solution may be unwise. Some ways of reducing dependency on oil can be through using distributed renewable energy for domestic consumption, which should be mainstreamed and incentivised, both in urban and rural areas, aiming at a big shift in the next 5-6 years. Reliable, efficient and affordable public transport should be promoted to reduce the expansion of private vehicles, and with that drastically reduce oil consumption. Not only that, it also reduces energy intensive raw materials such as steel, aluminium, rubber and plastic – which together account for about 40% of the energy consumption on an internal combustion engine based personal vehicle over its lifecycle. Coal is a reality to stay for some more time and the country has enough, if it is not used for domestic consumption and allowed only for industrial use.
The government is already planning to reduce oil imports by promoting blended fuels and making ethanol blending mandatory for petrol. This is possible only in steps, so that the adverse impacts of sourcing biofuels (deforestation, monoculture cultivation leading to loss of biodiversity, overconsumption of water from aquifers, etc) can be mitigated.
On the issue of investing in oil and gas operations in the USA and Canada, as the article points out, these countries discourage majority takeover by foreign governments. This would further benefit the few large companies in India with oil and gas refineries and crackers, while putting the public sector at a disadvantage. With public sector oil companies already being bled of their finances this could be the final nail in the coffin. After all, the windfall gains would enrichen the coffers of the private sector. In a situation where fuel costs are already high and the government is not adequately regulating, higher private sector participation in energy, which is an essential service, will result in rates being managed by the market rather than regulated by the government. Finally, it is the common people who will pay for this.
While reducing its dependence on oil, it is true that in the short term, India would need to continue to source its oil requirements from oil rich countries during the transition period. For this, while a sovereign wealth fund is indeed aspirational, we suggest that the source of wealth for this come from the wealthy 0.1% and not by taxing the poor, as indicated by the author when he says, “At times when oil prices are low, as they have been from 2015-2020 including a brief stretch of negative price, some of the windfall can be channelled into such a fund.”
While envisioning a sovereign wealth fund, it would do well to remember the experience of the Oil Industries Development Cess Fund administered by the Oil Industry Development Board (OIDB). The Fund was created by a special legislative action in the year 1974 for the purpose of development of oil industries. Two of the key purposes for setting up this fund were “Prospecting for and exploration of mineral oil within India (including the continental shelf thereof) or outside India” and “The establishment of facilities for production, handling, storage and transportation of crude oil”. Yet, as per section 16 of the Oil Industry Development Act, 1974, the proceeds collected are first to be credited into the Consolidated Fund of India. This resulted in OIDB being starved of the funds that it was entitled to. Based on figures published in the Annual Reports of the OIDB, only Rs. 902.42 crores have been transferred to the OIDB from the total amount of Rs. 2,22,674.52 crore collected from 1974-75 to 2019-20, which works out to a mere 0.40% of the total!
Therefore, should a sovereign wealth fund be instituted, measures are needed to ensure that the fund is not diverted to other purposes. In the long run, it would also be critical to ensure that part of this sovereign fund be used for climate mitigation, which should consider people who are most vulnerable to the climate crisis and the immediate environment they live in. Over the medium term, the fund can transition away from the oil and gas industry, and towards further accelerating the switch to decentralised and sustainable energy sources.
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