International Finance Project

Submitted to : Ms. Shruti Mukundan

Submitted by: Group 5

Roll No. Name

B-021 Parth Mahajan
B-022 Poorva Mendiratta
B-023 Pragya Pradhan
B-024 Prakhar Nema
B-025 Priyam Agarwal
FACTS:
1) Indian Government reduced GST to 12% from 18% towards digging beyond 12 nautical
miles - Government’s bid to promote E&P activities.
2) India has started importing shale oil - Imports of shale oil into India is a step towards
bolstering energy security. This reduces India’s dependence on OPEC (Organization of the
Petroleum Exporting Countries) nations, while tapping into the US, which has been the
fastest-growing oil producing nation in recent years.
3) Saudi Aramco’s investment in India, many more such investments under pipeline - Besides
Aramco, Russian state-owned Rosneft, which recently acquired Essar Oil for $13 billion,
and American major Exxon Mobil have also committed further investment in India’s oil
and gas sector.

AIM:
To reduce India’s crude oil imports by 10% by 2022 - Government’s bid to achieve self-sufficiency
by enhancing indigenous production of petroleum products.

Q1) Do you think these activities will have an impact on Dubai crude. Justify.

These activities have definitely cautioned OPEC.

India and other Asian countries were dependent to a large extent on oil production in west Asia
by the Organisation of Petroleum Exporting Countries(OPEC). Because of the proximity to Asian
economies, these OPEC countries charged a premium for oil they supplied. Taking into account
that the cost of transportation from any other major oil producing countries would be prohibitive,
OPEC countries got away with this. India has been raising the issue of the premium with OPEC
countries over the last three years. It was evident that this attempt to frustrate or assign lower
importance to Indian demand would be detrimental to the suppliers. As the cartel of OPEC
nations was trying to keep oil prices higher by deliberately cutting production, US oil fields were
firing on all cylinders. As a result of higher supply, the spread between Dubai Oil and those from
Brent and West Texas Intermediate fields in favor of the western oil fields. This ultimately made
importing oil from the US cheaper than those from west Asia. Using a VLCC (Very large Crude
Carrier) to transport oil reduced the cost of transportation and made the decision economically
viable.
In the context of around 1500 million barrels of oil imported by India, the present imported by
India, the present import is too small to move the needle, but surely going to turn heads in the
OPEC world as the cartel struggles to find new markets and environmental awareness puts
pressure on oil demand.
OPEC’s Secretary General Mohammed Barkindo urging on the US shale oil producers to help
curtail global supply and the OPEC countries and Russia cutting supplies to prop up prices and
even then couldn’t make much a difference to the price shows that they are suffering and will
not be able to sustain the rebalanced market in the medium to long run.

Hence, India’s import of shale oil has stunned OPEC as India being the fourth largest importer of
oil in the world imported 64% of its oil from Saudi Arabia and other middle eastern countries &
with it’s oil demand surging every year, OPEC can’t afford to lose their share in Indian Market.
According to a report by Bloomberg, Saudi Aramco’s potential partnership in India is an extension
of Aramco’s strategy to lock up market share by investing in refineries in Asia, which is driving
global oil demand growth. “I am convinced that the world's fastest growing energy consumer
and the world's largest, lowest cost and most reliable oil supplier, must elevate their relationship
to a much higher plane” as stated by Amin H Nasser, CEO, Saudi Aramco.
Q2) In how many years do you think shale oil will take sizeable position of crude oil market?
Justify.

US shale oil production has grown from about 0.4 million barrels a day in 2007 to more than 4
million barrels a day in 2014. This expansion was stimulated by the high price of crude oil after
2003, which made the application of these new drilling technologies cost competitive. This
magnitude is far from negligible, but to understand the excitement about shale oil one has to
consider projections of future US shale oil production.

● One concern is that increases in shale oil production are not permanent.
Sustained production requires ongoing investment. Projections by the US Energy Information
Administration suggest that even under favorable conditions US shale oil production will peak by
2020 (at a level commensurate with US oil production in 1970) and then decline. Moreover, even
the peak level would be far below what is needed to satisfy US oil demand.
● A second concern is that estimates of the stock of shale oil that can be recovered using
current technology are subject to considerable error.
In the summer of 2014, for example, the Energy Information Administration was forced to lower
its previous estimates of the stock of recoverable shale oil by 64%.
● A third concern is that it is not known how vulnerable the shale oil industry is to downside
oil price risk.

To assess the prospects of the shale oil sector, it is important to understand that shale oil is
fundamentally different from conventional oil production in many ways:
Firstly, shale oil requires continuous drilling as the production of wells declines rapidly (with
typically about 50-60 % of production during the first year of production).
Secondly, shale oil requires the drilling and fracking of many wells that are very similar in design.
Thirdly, whereas conventional oil is mostly about finding oil in the first place, shale oil is rather
about finding those places where the oil can actually be produced at commercial rates. The key
to success therefore is finding the sweet spots, with systematically higher EUR’s. Even within a
single sweet spot area well performance is highly variable, however. So far the industry has not
been very successful in predicting sweet spots. As a result, it takes many wells before sweet spots
(which may be the only places where commercial production can take place) can be located with
some confidence. Hundreds of wells are needed to properly evaluate the play. Subsequently
many thousands of wells are needed to produce.
Interpretation: It seems that US has been a victim of its own success. Shale oil on one hand
improved their trade deficit whereas on the other hand it attributed a majorly in falling oil prices
since 2014 due to excess supply since US stopped importing. Since the prices of oil have declined,
Shale oil has become unprofitable. Another important thing to mention is Shale is not a perfect
substitute for sweet crude oil.
Furthermore, Saudi Arabia is intentionally leaving the oil taps on as a strategy to kill North
American shale. Their strategy is to flood the market with cheap oil, drive out those companies
by bankrupting them, and then go back to the glorious days of high oil prices.
To conclude, until the time the global crude oil prices remain low, shale oil won’t be profitable
for US and they will ultimately have to cut down the production.
In short, there is considerable uncertainty about the persistence and scope of the US shale oil
boom, and there are many reasons to be skeptical of the notion that the US. Maybe, after 2
decades, when the sweet crude oil reserves start to deplete and with to advancement in
technology, extraction of shale oil becomes simpler and cheaper, it’ll obtain a significant
position in the global market.