Covid-19 crisis and the problem of plenty for India's fuel sector

The plummeting demand for energy across the board is causing a major headache for the sector will be how to balance its limited storage capacity

India’s coal ministry is trying to substitute imported coal with domestic production to keep power plants interested in taking more supplies. Last week, oil marketing companies IOCL and Mangalore Refineries and Petrochemicals invoked force majeure with suppliers from Saudi Arabia and UAE in order to stop having to take additional delivery of crude.

Over-supply of fuel has become a chief concern for the Indian economy, when demand for energy has plummeted across the board due to the Covid-19 induced lockdown.

Yet the shape of the problem is not uniform. Demand for LPG for instance has shot up after the government promised free refill of cylinders for at least three months to all those getting subsidised supply.

Coal supply:

Anil Jain, secretary, Ministry of Coal is therefore looking for alternatives. “I am trying to encourage port-based coal-fired power plants to cut down on their imports,” he told Business Standard. India has imported about 20 per cent of its total coal requirement in 2019-20, a shade lower than the 24 per cent for the year before.

Jain wants to cut into these imports by substituting them with domestic coal. For years the government had hoped this would happen but now with over-production from both CIL and Singareni Collieries Company Limited (SCCL), it finally may. The substitution will not include coking coal, used to fire steel furnaces, since there is no domestic spare capacity to offer, but is possible otherwise. His ministry is hopeful that since supplies are not a problem and domestic coal is far cheaper than imported coal, the coastal power plants will make the switch.

Jain has meanwhile written to the power secretary, Sanjiv Nandan Sahai, to ask the power plants not to push back against supplies from CIL. India’s thermal power plants, with an installed capacity of 231 Gw, have always struggled with inadequate supply of coal to keep them running. That was turned upside down in April this year. Their backyards are rapidly filling up with coal, as freight trains from CIL and SCCL are arriving all too regularly, even as demand for generation has plummeted. Till April 18, as per Central Electricity Authority data, there has been a cumulative 8.06 per cent gap between what these plants could produce and what they ended up supplying.

But energy sector experts are not sure this trend needs to persist. “Given that the rabi crop has been reaped and summer is setting in, it is economically efficient to optimise the dispatch from storage hydropower to minimum requirement for drinking water and other essential purposes, in view of the low electricity demand,” said Gaurav Bhatiani, Director–Energy and Environment at global think tank, RTI International India.

Data for generation from hydro power plants buttress his point. While there was a negative gap for thermal production, hydro production has got ramped up. While thermal plants idled, hydro power was 14 per cent more than planned in the same 18-day block in April.

Bhatiani says tamping down on hydro production “will also assist in mitigating the coal storage issue being faced in certain plants and parts of the country”.

The coal secretary is also upset that the power plants have used this opportunity to demand a lower price for coal. “It is not related to the issue of storage, why have they brought it up now,” he says.

Crude supply:

Even as oil marketing companies  wrestle with similar problems of excess supply, they have shortage problems too. IOCL has reduced its crude processing by 30-40 per cent and shut its naphtha cracker plant because of falling demand. It has made the disclosures in its letter to the suppliers invoking its force majeure. IOC accounts for about a third of the country's 5-million-barrels-per-day (mbd) refining capacity. The other major producers are BPCL and HPCL.

But this has implications. The same process of refining which produces petrol and diesel also produces LPG, the cooking fuel whose demand has shot up. Some 15.1 million free LPG cylinders have been distributed so far this month under the Pradhan Mantri Garib Kalyan Yojana. The government has promised to provide three cylinders free to the 80 million eight crore people who are eligible to get this free supply. The total LPG subscribers in India is about 27.9 crore. Daily demand for refills has shot up to 53.6 lakh after the scheme was announced as one of the measures to help people, post the lockdown. It is one of the key reasons why the companies cannot cut production even more to save their balance sheets.

Yet even this cut means IOCL, BPCL and HPCL have to buy LPG from abroad to make up for the slack in their refineries. While no company was willing to come on quote in response to mails sent out by Business Standard, it is understood that demand for LPG supply from West Asia has shot up by 60 per cent. Total LPG imports had grown from 264 mbd in 2014 to 464 in 2019, a cumulative growth rate of 14 per cent as per petroleum ministry data as domestic production has not kept pace with demand. The current demand spurt will raise these numbers in 2020-21. India is already the third largest importer after USA and China as the demand for cooking gas has shot up in recent years because of the government reach out to the poor through the Prime Minister Ujjwala Yojana.

But despite the low production, India’s storage capacity for oil is running out. India’s strategic storage capacity is just 5.33 million tonnes built at Vishakhapatnam, Mangalore and Padur. It is already over half full as of now, says S&P Platts. Compared with China’s total capacity is 550 million barrels, Japan’s SPR is 528 million barrels and South Korea has 214 million barrels, India can store just about 39 million barrels. The current level of imports will top it up soon.

The additional capacity with the companies in production is not much. IOCL for instance, runs a capacity of 125 bulk storage terminals and depots and 91 LPG bottling plants. But a Bloomberg report notes about 95 per cent of about 85 million barrels of fuel storage capacity across the three major companies is already full. They are also selling their cargoes on high seas with minimum lead time. Most of them are already close to their capacity in April. The other options are pipelines but India does not have any transcontinental lines and in any case due to trace microbial actions, those too are difficult to sustain without costly supervision. As the Platts data shows India will post a negative growth in its oil demand in 2020, which means a major headache for the sector will be how to balance its limited storage capacity.