Slow pace of capacity addition casts shadow over India's refinery targets

Recently, Prime Minister Narendra Modi said India should add 200 million tonnes (MT) of refining capacity, around 80 per cent of existing capacity. Industry officials said this additional capacity — which amounts to 4 million barrels a day — must come up in the next 10 years if it has to make an impact on consumption, and enable refiners to recover their investments.

But state-run refiners led by IOC, which together account for 65 per cent of the domestic business, are proving slow to the draw. IOC’s Paradip was the last greenfield project inaugurated in 2016 by Modi, commissioned after a long delay. That calls into question whether Indian refiners can meet the government’s refinery dream even halfway.

Indian refiners must add around 20 MT of capacity a year to meet the PM’s target. But the growth in refining capacity expansion has practically stalled to a compound annual growth rate (CAGR) of just 1 per cent over FY2017-22 compared to around 2 per cent over FY2012-17, according to Crisil Research. In absolute terms that means refining capacity improved by only 17 MT compared to 21 MT in the two five-year periods.

Over the next few years, data from refiners suggest that hardly 50 MT of capacity may come up with state-owned refiners sitting on decisions for the past six years to build new projects, despite government backing.

IOC said that it will add 27 MT a year by 2024-25. It declined to give more detail, but it has hardly added any meaningful capacity since the 15-MT refinery at Paradip. Six years after Paradip, it approved building a 9-MT refinery in Tamil Nadu. HPCL may complete a similar sized refinery in Barmer next year, while its Vizag refinery expansion was delayed on account Covid-19. The Numaligarh refinery in Assam will add 6 MT capacity by fiscal 2025. MRPL is dilly-dallying over adding 15 MT at Mangalore. And BPCL, bogged down by privatisation plans, will add only 4 MT at Bina in five years.

Upcoming capacity of 50 MT may yield only around 30 MT of fuels because around 25 per cent of the capacity from new refineries will be dedicated to petrochemicals, and another 10 per cent used to run the refinery, said a former chairman of a state refiner. State refineries are sharply increasing the oil-to-chemical conversion ratios at new plants to around 25 per cent from 5-10 per cent now to hedge their bets against electric vehicles (EVs) substituting transport fuels in the coming decades.

This apart, exports leave India with less fuel for domestic use. Earnings from oil product exports totalled $49 billion in April-January FY23, accounting for 15 per cent of India’s gross exports by value, which is hardly chump change. Reliance and Nayara account for the bulk of exports with state oil companies catering to the domestic market.

After exporting 62 MT of products last fiscal, only around 190 MT of capacity was available for domestic use. That was sufficient to meet most of the current demand — because 60 per cent of LPG or cooking gas is still imported — but inadequate to meet 200 MT of new fuel demand by 2040, the largest increase for any country that the Paris-based International Energy Agency (IEA) estimated in its 2021 India Energy Outlook. Opec’s World Oil Outlook forecasts that India’s oil demand will double to 11.1 million barrels a day (550 MT) by 2045.

Indeed, oil demand is rebounding with a vengeance. Diesel consumption was up 6.9 per cent and gasoline sales rose 8.8 per cent in February from a year earlier. Crisil, India Ratings and the oil ministry expect total fuel demand to grow at 4-5 per cent a year.

“India is the most important source of global incremental demand going forward, even larger than China,” said London-based Tilak Doshi, an international oil expert who has worked in senior roles in Saudi Aramco and King Abdullah Petroleum Studies and Research Center in Riyadh.

“We anticipate that there are expansion opportunities available,” said Bhanu Patni, associate director, India Ratings. But the upcoming capacities are expected to be more integrated with petrochemical value chains as well, he added.

“All the EVs, renewables and a potential increase in gas consumption aside, India is going to need more oil to meet growing energy needs,” said Vandana Hari, a Singapore-based energy markets expert. “And going by the expected drop in global refining capacity after the current wave of projects comes on stream over 2022-25, Indian refiners could stand to profit by exporting products.”

But state refiners slowed capacity addition fearing an exodus to EVs, a senior official from a state refiner said. Yet EV sales next fiscal will trail state targets by half, according to a Business Standard report, and if the subsidy component is withdrawn next year, sales will flag further. EV demand outlook is suffering in most countries, as governments get fatigued by the endless subsidies required to push EVs, Doshi added.

“While the current impetus on decarbonisation — including improving blending and production of biofuels — is expected to cast a shadow over long-term consumption growth, a significant decline in consumption of petroleum products remains unlikely,” said Hetal Gandhi, director, Crisil Research.

Modi blamed a “culture of delays” at the launch of the 15-MT a year Paradip plant, which began when Atal Bihari Vajpayee was the PM. That compares with Reliance Industries completing two refineries each with a capacity of 27 MT a year, in Jamnagar, taking just three years for each plant, according to company data. IOC declined to comment on delays to its projects.

The cost of HPCL’s Barmer Refinery has surged by 67 per cent to ~72,000 crore, said Oil Minister Hardeep Puri, attributing the increase to higher commodity prices and Covid delays. But for a project scheduled to be ready by March 2024, orders for steel and other equipment should have been placed much earlier, an industry official said. HPCL declined to comment.

Another major setback for India was shelving a 60-MT grassroot refinery project at Ratnagiri in Maharashtra, proposed in 2016 and scheduled for completion this year, deeply disappointing project partners Saudi Aramco and Abu Dhabi National Oil Co. State oil refiners were partners in the project.

Other private sector projects have not materialised for various reasons. The Russian invasion of Ukraine has threatened expansion projects at Rosneft-run Nayara Energy after Moscow came under stringent sanctions. In short, India’s energy security and the Aatmanirbharta may both be on the line unless state refiners step on the gas.