India needs to further boost refining capacities to retain fuels self-sufficiency

Picture: Auto rickshaw driver in New Delhi, India (ZUMA/REX/Shutterstock)

SINGAPORE (ICIS)–Indian state-owned refiners will have to add capacity at a much faster rate than in the past to maintain self-sufficiency in transport fuels, according to an oil and gas industry consultancy on Monday.

“As the balance of oil demand growth tilts towards India and southeast Asia, these markets will lead in increasing Asia’s refining capacity,” said Sushant Gupta, research director for Asia refining at Wood Mackenzie.

“This is an important shift for the refining markets in Asia as both India and southeast Asia NOCs [national oil companies] have traditionally been slow in adding refining capacity,” Gupta said.

India has 21 refineries with a total refining capacity of around 4.6m bbl/day, of which 60% is owned by NOCs.  The country, which is Asia’s second-biggest emerging economy, has about a 13% share of Asia Pacific’s total refining capacity, according to the consultancy.

While the outlook for domestic production remains positive with new capacities being planned, more is needed to boost supply, said Alay Patel, senior analyst for Asia upstream at the consultancy.

“The introduction of Hydrocarbon Exploration and Licensing Policy (HELP), a simplified licensing regime, and various other policy initiatives ranging from gas pricing incentives to contractual extension clarity will help boost domestic supply,” Patel said.

“Allowing marketing and pricing freedom for all gas production, regardless of shore status and contract vintage, would incentivise companies to develop gas in the less explored basins.  This will also remove the multiple gas pricing regimes which are in effect,” Patel added.

Additionally, production enhancement contracts which will allow private and foreign operators a stake in national oil company-held “nomination acreage” will help diversity the company mix, which is currently dominated by a handful of players.

“This would also bring more focused and nimble operators to India,” he said.

A mega 1.2m barrels/day refinery is being planned in the west coast of India by all the state refiners, and Saudi Aramco is interested in a stake. The recent opening of Aramco’s Indian office signifies its interest to secure the Indian market, according to Patel.

On the gas front, growth in demand is expected to outpace the increase in domestic supply. India’s gas market is expected to grow at compounded annual growth rate of 7% by 2020, boosted by new gas infrastructure and increasing domestic production, according to Wood Mackenzie’s senior analyst for Asia gas and power Terence Ang.

Its imports of liquefied natural gas (LNG) are estimated to increase to around 19.6m tonnes/year in 2017 from 14.4m tonnes/year in 2014.

“We expect a glut in LNG supplies will allow surplus volumes to flow to India,” Ang said.

The competitiveness of gas is eroded by cheaper fuel oil and petroleum coke prices, the industry analyst said.

“The government has allowed pricing freedom for domestic gas produced from the HELP blocks. This, together with the revised domestic gas allocation order, will force industrial, commercial and power users to pay market prices for gas going forward, regardless whether it is from LNG or domestic production,” Ang said.

“If the price of Brent [crude] rises beyond $66/bbl, we expect gas (LNG) to be more competitive as competing fuels such as petcoke and fuel oil will become more expensive,” Ang said.