India's top oil companies slide on net-zero goals to slash emissions

They have ambitious targets, but are still to outline how they'll get there or their funding plans

India’s top oil companies, led by explorer Oil and Natural Gas Corporation (ONGC) and refiner IOC, have set some of the most ambitious net-zero goals on the planet, well ahead of India’s plans to slash emissions -- the national target of 2070 is the farthest among major nations.
 
Goals to slash emissions are at least a decade ahead of what BP, Total, Exxon, Chevron and Shell have announced. Indian state-owned majors propose to deal with low-hanging fruit, Scope 1 and 2 -- or operational -- emissions well before India’s 2070 time frame. Scope 3 or indirect emissions, which is by far the biggest, and generated from use of the company’s products, are excluded.
 
Despite impressive targets, India’s oil companies are yet to come up with detailed plans on how to raise funds to achieve them or explain to investors how profits and revenues from their core, traditional refining and marketing business will be compensated by new and unfamiliar businesses such as solar and wind projects.
 
ONGC, IOC and other state refiners have announced investment needs of a combined Rs 4-5 trillion to make the clean energy transition. But none, barring Reliance, which is moving men and materials in Jamnagar, buying up battery companies and renewable technology firms, have outlined a funding path.
 
What is now available for state oil companies is around Rs 300 billion provided by the government in this financial year’s budget by way of equity infusion. That’s less than a tenth of what these companies need.
 
In India’s case, attitudes and commitments made by the Modi government at global fora matters more to state oil companies because they are majority-owned by New Delhi, said Parth Kumar, an emissions expert with New Delhi-based think tank Centre for Science & Environment.
 
IOC, BPCL and HPCL together emitted a combined 40 million tonnes of CO2e in Scope 1 and Scope 2 emissions, which may grow by at least 50 per cent by 2030 as India’s oil use expands in line with GDP growth, according to data by Crisil Research and state oil companies. Scope 1 covers emissions generated by a company’s facilities; Scope 2 are indirect emissions from consumption of power, heat or steam; and Scope 3 damages the planet the most, being emissions generated by consumers or other third parties from use of the company’s products and services.
 
India’s state oil companies are yet to provide an answer to lower returns from renewable projects, especially with India’s solar and wind tariffs among the lowest in the world. In financial year 2023, average bid tariff for ground-mounted solar plant stood at around Rs 2.67 per unit, which would result in equity IRR of 8-10 per cent; for wind projects equity IRR is usually in the range of 7-9 per cent because of high competition resulting in lower tariff, said Hetal Gandhi, director, research, Crisil Market Intelligence & Analytics.
 
These are much lower than the returns that IOC and others derive from their current fossil fuel business. The returns from renewables also trail a 15 per cent return on equity to coal plants provided by tariff regulation.
 
There is a struggle to find the funds and the focus for clean energy, which are less lucrative and more capital-intensive, industry officials said. Free cash flow generation is hampered by the nature of ownership and state policies. Both Oil Minister Hardeep Puri and refiners claim that they are still making losses from retailing fuels at below-market prices. ONGC is held hostage by price caps on domestically produced natural gas. All of them pay large dividends to fund New Delhi’s budget, or, in some cases bail out Delhi’s privatisation programme.
 
India’s ONGC, the country’s biggest oil and gas producer, is the most aggressive in setting a 2038 net zero target. ONGC’s 2038 target compares to 2060 by Indonesia’s Pertamina and 2050 by Malaysian Petronas and Chinese state energy companies, which are financially much stronger than ONGC. With 11 million tonnes of CO2 equivalent ONGC expects to achieve net zero in five years, and grow renewable power generation 50-fold to 10 Gigawatt (Gw) from current levels; also on the anvil are plans to create 1 million tonnes a year of green ammonia capacity by 2030.
 
ONGC chairman Arun Singh, formerly the CEO of refiner BPCL, spent much time at a recent press briefing to dwell on the company’s Rs 1 trillion net zero plans. But in ONGC’s 49-slide media presentation, just one slide discussed renewable plans in broad terms, while the rest detailed fossil fuel plans, including 23 major projects costing over $1 billion apiece.
 
IOC, the country’s largest fuel retailer, has plans to reach net zero by 2046 by investing Rs 2 trillion in biofuels, renewable power and green hydrogen, exceeding its expenditure in traditional fossil fuel businesses. The company plans to build 35 Gw of renewable power, 4 million tonnes a year of biofuels and 1 million tonne a year of biogas by 2030, and 200 Gw of renewable power capacity, 7 million tonnes a year of biofuels and 9 million tonnes a year of biogas by 2050.
 
A proactive role by state oil companies to slash emissions currently plays a relatively small role in India’s overall clean energy ambitions. The bulk of India’s emissions (about 70 per cent) of over 3 billion tonnes of CO2 equivalent are driven by six sectors: power, steel, automotive, aviation, cement, and agriculture, according to McKinsey. But transport accounts for less than a tenth of the country’s pollutants, with over a third coming from the power sector. But prime polluters state-run NTPC and state generating entities have linked their net zero targets to India’s 2070 date.
 
To be sure, Indian oil companies are not outliers in this respect. Despite having net-zero targets, most oil and gas companies in Asia Pacific have not yet developed interim targets or detailed implementation plans, said a recent report by US think tank Institute for Energy Economics and Financial Analysis. Overall, just 5 per cent of oil and gas company capital expenditure worldwide was on clean energy in 2022, according to the Paris-based International Energy Agency. Meanwhile, globally, oil and gas majors are deviating from plans for a cleaner future. On paper, BP, Chevron, ExxonMobil, Shell and TotalEnergies have pledged to reach net zero by 2050. Now BP and Shell have retracted on green goals after the return on investments from renewables trail returns from oil projects.