Refining reality: World expects India to go past China in global oil demand

Can the country's refining capacity keep up?

India’s ambitions for its refining sector haven’t quite translated into action on the ground. This has implications for energy security, fuel imports and domestic demand.

There was a time when delays by India in planning projects were insulated from the world economy. Not anymore. 

The International Energy Agency (IEA) expects India to be the biggest driver of growth in global oil demand in the coming decade, displacing China. So, domestic policies in the energy sector have a significant impact on the flow of global investment, and spill over to climate change management.

Aware of the world’s eyes on India as a prime destination for energy investments, and driven by the need to ensure supply security and foster aatmanirbharta (self-reliance), Prime Minister Narendra Modi pitched for boosting refining capacity to 450 million tonnes (9 million barrels per day) by 2030 at the first edition of the India Energy Week (IEW) in Bengaluru in 2023 and at its second edition in Goa last week. 

This amounts to adding 4 million barrels per day (b/d) in seven years, or around 600,000 b/d a year. That’s akin to adding one Reliance Industries’ refinery every year. 

Modi was echoing a global view over concerns that inadequate refining capacity after the pandemic, and a world economy plagued by inflation, low growth and supply-chain disruptions, had extended the life of India’s fossil fuel economy.

“From 2026 to 2030, we actually see only 500,000 b/d of net new capacity additions coming up each year,” said Amrita Sen, head of research for Energy Aspects, a London-based research house, at the IEW in Goa. That, she said, is nothing compared to the growth in oil demand of at least 1-1.5 million b/d each year. “So, there is likely to be a deficit of products – transportation products, in particular – because investment is continuing on the petrochemical side,” Sen said. 

In the Organisation for Economic Co-operation and Development (OECD), refiners have announced they will shut refining capacity amounting to 1 million b/d over the next four years, with Europe leading the way. Western nations may, in fact, be looking to India, a major petroleum products exporter, for fuel supplies.

However, Indian refiners, both state and private, as well as officials, it seems, have not cot­ton­ed on to an emerging refining scarcity. In the past year, no new plans for additions were ann­oun­ced, though such facilities take 5-7 years to build.

In 2018, an oil ministry report projected refining capacity to touch 8.8 million b/d by 2030. However, in a reply to Parliament, Minister of State for Petroleum and Natural Gas Rameswar Teli scaled it down to around 6.1 million b/d by 2028, citing long-term growth trends in fuel consumption and increasing adoption of alternative fuels.

Over the next seven years, Indian refiners will add 1 million b/d of new refinery distillation capacity — more than any other country in the world outside of China, the Paris-based IEA said. That is still a quarter of what Modi seeks. 

The IEA pointed to several large expansion projects, which are now under consideration and which may lift refining capacity beyond its modest expectation of 6.8 million b/d by 2030.

Modi’s prescription for India’s oil sector also dovetails with the country’s need for affordable fuel to meet a 7 per cent-plus growth rate en route to becoming a $7 trillion economy.

The IEA expects India to increase domestic oil demand by almost 1.2 million b/d — accounting for over one-third of its projected 3.2 million b/d of global gains — to reach 6.6 million b/d by 2030.

Currently, diesel/gasoil is the primary driver of oil demand growth, constituting nearly half of the surge in India's overall demand. And demand for jet kerosene is poised to grow strongly, at an average of 5.9 per cent annually. The least growth is projected for gasoline, which is expected to increase at an average rate of 0.7 per cent, dampened by the impact of biofuels and the electrification of India's vehicle fleet, the IEA report said. However, gasoline accounts for only around 16 per cent of India’s fuel consumption basket. New Delhi faces a challenge in finding alternative fuels for the rest of the basket.

India may at best add around 70 million tonnes, or 1.4 million b/d, in refining capacity by 2030, a top official from a state-run refiner told Business Standard. 

Ongoing scaling-up adds up to around 1 million b/d by fiscal 2027/28. This includes IndianOil adding around 550,000 b/d year by 2025-26, including a 180,000 b/d greenfield refinery in Tamil Nadu. Hindustan Petroleum is completing a similar sized refinery in Barmer (Rajasthan) by 2025 and its Visakhapatnam refinery’s expansion of 300,000 b/d this year. The Numaligarh refinery in Assam is adding 120,000 b/d by 2025. And Bharat Petroleum is adding 134,000 b/d at Bina (Madhya Pradesh), besides other plants in five years.

Beyond these additions, which were planned in the past, refiners are silent on scaling up. A director of a state-run refinery said the failure to set up a 1.2 million b/d refinery at Ratnagiri (Maharashtra) with Saudi Aramco and UAE’s Adnoc had upset all calculations.

“‘India’s oil demand will more than double to 11.6 million b/d by 2045 from 5.1 million b/d today, largely driven by transportation fuels and petrochemicals,” BPCL Chairman Krishnakumar Gopalan said at the IEW. Despite this, the refiner plans a meagre addition of 220,000 b/d by 2035. "We should not be overinvesting or underinvesting in the next 15 years,” he said, without giving details.

The Rosneft-owned Nayara Energy, too, made no significant commitments. “At the highest level in the government, there is clarity that India needs to double the capacity in 10 to 15 years, and that would definitely be achieved,’’ said its chairman Prasad Panicker at the IEW. While he spoke of petchem additions at the 400,000 b/d refinery in Vadinar (Gujarat), he refused to commit to any major capacity additions at the refinery.

Meanwhile, the 240,000 b/d HPCL-Mittal plant at Bathinda (Punjab) may add new capacity, its CEO Prabh Das said at the IEW. He, however, declined to give details. HPCL officials said they were not aware of any expansion plan at the refinery. 

Reliance Industries, too, has not announced any plans to boost refining capacity at Jamnagar, and is instead focusing on petchem and new-energy investments.

While oil secretary Pankaj Jain said new refineries would focus on increasing conversion ratios from crude to petrochemicals to 10-15 per cent from 4-5 per cent, he offered no details on how the country can double its refining capacity this decade.

A top official from a state refiner told Business Standard that refineries make for a 15-year investment-return horizon, and that they were uncertain about New Delhi’s policies, especially the flip-flops over biofuels, electric vehicles and fuel pricing. Industry officials said what they need is policy stability or financial incentives from the Centre, such as the production-linked incentive (PLI) scheme.

Last November, the government reduced funding commitments for energy transition projects at refineries by 50 per cent, a move pivotal for expanding capacity to Rs 150 billion, but no funds have been released so far. Also, this commitment has been pushed to 2024-25. All this, officials said, has made state-run refiners wary of committing to investment in long gestation projects like refining.

The sector could do with a stable base.