Gulf crisis: India must urgently reform its energy sector

If there is one factor the current war in Iran and the Gulf has incontrovertibly demonstrated, it is India’s vulnerability to the assured availability of oil and gas. There is a certain irony in India’s energy story. We are among the world’s largest refiners of petroleum products, exporting fuels to several countries, and yet remain overwhelmingly dependent on imported crude oil—the very raw material that sustains this edifice.

India today imports close to 87-89 per cent of its crude oil requirement. This is a result of decades of policy inertia, geological underperformance, and a hesitant embrace of reform in the upstream energy sector. As the world’s third-largest consumer of crude oil, India’s appetite has grown rapidly, but its domestic production has remained stubbornly stagnant.

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The primary reason for India’s emergence as one of the world’s largest importers is simple: demand has surged while domestic production has plateaued. India’s consumption of petroleum products continues to rise, driven by transport, urbanisation, and industrial expansion. Yet domestic crude output has hovered at roughly 29–30 million tonnes annually, showing little meaningful growth.

The discovery of oil in Bombay High in the 1970s was a moment of national optimism. It promised energy self-reliance and a reduction in dependence on volatile global markets. For a time, it delivered. But Bombay High has long since matured, and its production has declined. What should have followed was an aggressive and sustained push for exploration across India’s sedimentary basins. Instead, progress has been sporadic, bureaucratically encumbered, and technologically uneven.

Many experts feel that, compared to global benchmarks, India’s sedimentary basins remain under-explored or underdeveloped. The reasons are not difficult to identify: restrictive policies, complex contractual frameworks, pricing uncertainties, and delays in environmental and regulatory clearances. For decades, India’s approach to oil exploration has been marked by excessive state control and insufficient incentives for private and foreign investment. The earlier Production Sharing Contracts (PSCs) were mired in disputes over cost recovery and profit-sharing. Even subsequent reforms, such as the Open Acreage Licensing Policy (OALP), while conceptually progressive, have not yet delivered the transformative results envisaged.

Foreign oil majors, with their technological prowess and deep pockets, have often been wary of entering India’s upstream sector. The reasons are familiar: regulatory uncertainty, retrospective disputes, and a perception that the policy environment lacks stability and predictability. In contrast, countries that have successfully boosted domestic production—such as Brazil—have done so by creating investor-friendly regimes with transparent rules and assured returns.

The comparison with China is also instructive. Like India, China is heavily dependent on imported oil. However, its import dependence is lower—estimated at around 70–75 per cent—compared to India’s nearly 90 per cent. More importantly, China has pursued a multi-pronged strategy that India has only partially emulated.

First, China has invested heavily in domestic exploration and production, leveraging state-owned giants with significant technological capabilities. Its domestic crude output is several times that of India. Second, China has aggressively acquired overseas oil assets, securing equity oil from Africa, Latin America, and Central Asia. This ‘going out’ strategy ensures that a portion of its imports is effectively under its control. Third, China has diversified its energy mix with remarkable speed. Its push towards electric mobility, renewable energy, and alternative fuels has begun to moderate the growth of oil demand. In contrast, India’s transition, while underway, remains slower and uneven.

If oil tells a story of stagnation, natural gas offers a mixed narrative of promise and disappointment. India imports nearly half of its gas requirements in the form of LNG. The Krishna-Godavari basin once raised hopes of a gas revolution, but production has fluctuated, and expectations have not been fully realised.

Gas, being a cleaner fuel, should have been central to India’s energy transition strategy. Yet pricing controls, contractual uncertainties, and infrastructure bottlenecks have constrained its growth. The expansion of city gas distribution networks is a positive step, but without a commensurate increase in domestic production, dependence on imported LNG will persist.

To maximise gains, India must secure crude at competitive prices. Recent diversification—importing from Russia, the United States, and other non-traditional suppliers—has been pragmatic. But diversification merely mitigates risk; it does not eliminate it.

What then must be done?

First, India must radically liberalise its upstream sector. This means simplifying contractual frameworks, ensuring pricing freedom, and reducing bureaucratic delays. Investors must have confidence that policies will not change arbitrarily.

Second, there must be a renewed push for exploration. India has vast sedimentary basins that remain untapped. Advanced seismic technologies, data transparency, and collaboration with global leaders are essential.

Third, foreign participation must be carefully but actively encouraged. This is not a surrender of sovereignty but an assertion of pragmatism. Energy security is too important to be held hostage to ideological hesitation.

Fourth, India should pursue overseas oil and gas assets more aggressively, learning from China’s example. Equity oil provides a measure of insulation from global price shocks.

Fifth, the development of natural gas must be prioritised, with rational pricing and robust infrastructure.

Finally, and perhaps most importantly, India must accelerate its transition to alternative energy sources. Electric mobility, renewables, and green hydrogen are not merely environmental imperatives; they are strategic necessities.

The present moment, marked by instability in the Gulf, should serve as a wake-up call. India has the technological capability, the financial resources, and the strategic imperative to change course. What is required is clarity of vision and the courage to act.

(The writer is a former diplomat, an author, and a politician. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.)