Abstract
As Demand Increases exponentially, the Hydrocarbon Sector Struggles to keep the Fire Burning
Introduction
The role of the hydrocarbon sector is vital in keeping India’s economic growth engine running. The domestic crude oil consumption has increased from 174.5 million metric tonne (MMT) in FY2013 to 262.5MMT in FY2024, growing at a CAGR of 3.8%, while the domestic production of crude oil has declined from 37.9 MMT to 29.4 MMT during the same period. Currently, only 12% of the country’s needs are met domestically, while 88% of the domestic crude requirement is met through imports, entailing a huge import bill.
The demand for crude oil is expected to increase by 3-4% in FY2025 and will continue to increase over the next several years. However, with limited domestic crude oil production the dependence on import is likely to remain high. The domestic gas consumption has increased from 147.7 million standard cubic meter per day (mmscmd) in FY 2013 to 187.9 mmscmd in FY2024 whereas the domestic production has declined from 111.4 mmscmd to 99.6mmscmd over the same period. Production is expected to increase to 106-107mmscmd in FY2025 and 113 mmscmd in FY2028,with most of the incremental gas production coming from the Krishna Godavari Basin fields of Reliance Industries and Oil and Natural Gas Corporation.
Gas consumption in the country is expected to grow 6-8% YoY in FY2025 driven by a strong uptick in the offtake by the refineries and other allied sectors. The offtake by the power sector will also witness healthy growth over a lower base and is expected to remain at similar levels in the forthcoming years as well. The fertiliser sector will continue to remain the anchor, consuming nearly 31% of the total gas in the country in FY2024. The CGD sector is expected to witness healthy growth of around 8-10% YoY in FY2025 supported by favourable gas allocation policies, growing CNG vehicle sales, and rising network penetration. The gas consumption by other sectors, including refineries and petrochemicals is expected to grow by about 7-9% YoY in FY2025.
Pricing and Oil and Gas
Historically, thegovernment of India has controlled the prices of domestically-produced natural gas. From April 2023 the GoI revised the pricing formula for the administered price mechanism (APM) gas, which is now determined on a monthly basis at ~10% slope to the monthly average price of the Indian crude oil basket. For current gas production from the APM nomination fields of ONGC and OIL, a floor price ($4/mmbtu) and a ceiling price (initially $6.5/mmbtu) have been prescribed with an annual $0.25/mmbtu increase in ceiling price from FY2026 onwards. As crude oil prices are expected to stay at about $65/bbl due to the active management of supplies by OPEC+, APM gas prices are expected to stay at the ceiling for the medium term.
As per the schedule stipulated in the HELP/OALP, eight bidding rounds have so far been finalised. The OALP Bid Round-IX, offering 28 blockscovering an area of approximately 1.4lakh sq. km., was opened for bidding on January 3, 2024.
Since November 2016 OPEC+[1] has been actively managing crude production and supplies leading to elevated international prices. As of now, OPEC+ has agreed to production cuts of 3.66 million barrels per day (mbd) until the end of 2025 and an additional 2.2 million bpd until the end of September 2024. While elevated prices have aided US shale producers to ramp up production levels, however, Chinese demand has been less than anticipated. Nevertheless, ICRA expects the crude oil price to average between $75-90/barrel in FY2025. Additionally, the Government imposed a windfall gains tax on the upstream crude producers, which has kept the crude realisations for Indian upstream companies in the range of $72-75/bbl. However, even at these prices, profitability remains healthy, and capex lucrative.
To attract capital investments in the field of oil exploration and production, 100% foreign direct investment (FDI) has been allowed under the automatic route. While FDI and the big oil companies in oil E&P is the need, given the high risks, very few global companies are likely to participate since compared to some countries, India has poor data on geological prospects. Additionally, some of the key issues hindering the development of the upstream sector include – a high cess of 20% ad-valorem currently, slow pace of approvals, stalled progress in several blocks because of the absence of requisite approvals from the Ministry of Defence and/or the Ministry of Environment, Forest and Climate Change, delays in decision-making by the DGH, increasing arbitration cases involving the administration of production-sharing contracts, etc.
On July 1, 2022, the Government levied a cess/windfall tax on the production of crude oil by upstream oil and gas producers and on exports of ATF, HSD, and MS, which was revised many times subsequently. Currently, the special additional excise duty (SAED) on crude oil stands at Rs. 7000/T (~USD 11/barrel), which translates into an annual contribution of around Rs. 18,000 – 20,000 crore to the Government for FY2025 towards SAED on crude.
Refinery Capacity and Petrochemicals Manufacturing
The domestic refining capacity is expected to increase from 256.8 million tonne as on March 31, 2024 to 306.0 million tonne over the next four years. Some of the key projects being set up are as follows:
- Hindustan Petroleum Corporation, in a 74:26 joint venture with the Rajasthan Government, is setting up a 9 MMTPA greenfield refinery-cum-petrochemical complex at Barmer, Rajasthan, which is expected to be commissioned by FY2025-end.
- Chennai Petroleum Corporation and Indian Oil Corporation have formed a joint venture for setting up a 9 MMTPA greenfield refinery at Nagapattinam, Tamil Nadu, whose operations are likely to commence in 2026.
- Additionally, BPCL is also considering setting up a greenfield refinery at Machilipatnam in Andhra Pradesh.
Besides increasing the refining capacity, the downstream industry is also setting up petrochemical projects to diversify their revenues and de-risk from lower fuel sales over the long term. Some of the key projects are as follows:
- HMEL commissioned its 1.2 MMTPA dual feed ethylene cracker in March 2023
- HPCL Rajasthan Refinery will also be adding around 416 KTPA capacity.
- BPCL is setting up a 1.2-MMTPA ethylene cracker plant while increasing the capacity of its Bina refinery from 7.8 MMTPA to 12 MMTPA.
- Reliance Industries is adding around 1.5 MMTPA capacity for polyvinyl chloride
- Mundra Petrochem Limited is also setting up a 2.0 MMTPApolyvinyl plant.
On a global level, ethylene and propylene capacity is expected to increase by about 47 MMTPA and 44 MMTPA respectively, over the next five years. Accordingly, global ethylene operating rates which were at an annual average of 88% in 1990-2023 are expected to remain below 80% till 2030 due to large supply additions and weak demand as a result of high inflation and lower consumer spending amid weak economic growth in many regions of the world. The first wave of ethylene capacity addition is cooling off, but a second wave is expected to start in 2026. As a result of the excess capacity ethylene and propylene margins are expected to remain weak.
Due to the closure of about 4 million barrels per day refining capacity globally during CY2020 and CY2021, the refining sector enjoyed strong margins during FY2022-FY2024. However, with the commissioning of new refining capacities, the margins have been moderating. ICRA estimates Singapore GRMs for FY2025 at $4-5/bbl. Additionally, Indian refiners have also been procuring Russian crude oil at discounted rates since the mid of CY2022, which has buoyed the GRMs of domestic refiners. About 37% of the crude imports by India in FY2024 were Russian. However, with discounts on Russian crude moderating off late, the GRMs of Indian refiners would also be impacted.
Challenges on the Gas Front
With regard to the gas sector, the GoI has pushed for the setting up of trunk pipelines connecting the East and the Northeast through budgetary support in the form of viability gap funding for the Urja Ganga and Indradhanush pipelines. Apart from this, the Petroleum and Natural Gas Regulatory Board has concluded the 12th bidding round for CGD licences, which has essentially covered nearly the entire country, barring Mizoram.
Globally, gas prices had increased sharply from August 2021, owing to a number of factors such as increased demand, low inventory levels, weak renewable production, and Russia- Ukraine conflict, however, prices have since moderated. The upside to the LNG prices remains limited driven by healthy natural gas inventory levels in most of the key consuming industries, thereby ruling out the sharp uptick in demand and subdued macro-economic outlook, particularly in the EU region, keeping demand under check. Additionally, Japan and South Korea’s shift to use of nuclear energy for power in pursuit of reducing dependence on LNG will weigh on prices in CY2024. Going forward significant new liquefaction capacities are expected to come online from 2026 onwards,l eading to a supply glut, which should keep prices of LNG under check.
The Government of India has announced the mandatory blending of compressed biogas (CBG) in natural gas for the CGD sector. While CBG production has lagged owing to various issues so far, the GoI expects mandatory blending to support investments in the sector, going forward. Within the CGD sector, CNG drives around 50-55% of the CGD volumes and the same is expected to remain the major driver of CGD sales with its network growing almost 2x over the last two and a half years, driven by strong Total Cost of Ownership (ToC) advantage and rising CNG vehicle sales.
There are several LNG terminals that are being set up including at Jaigarh, Charra, etc. along with the recently commissioned terminals at Dhamra and Mundra, which would increase competition in the market and allow greater choices to consumers. The LNG terminal capacity would increase from 45.6MMTPA currently to 66.5MMTPA in the next 3-4 years.
Indian companies have been scouting for long-term gas agreements for the past couple of years to ensure the energy safety of the country. Petronet recently renewed its contract with RasGas in Qatar while GAIL and IOC have also signed a couple of contracts recently. As a part of the demand remains uncontracted and exposed to the vagaries of the spot LNG market, Indian players will look to commit to long-term supply purchase agreements with reliable suppliers with proven LNG project execution track record.
Some of the key issues hindering the development of the gas sector in the country include lack of pipeline connectivity across the country, especially in the eastern and southern parts, regulated realisations/product prices of natural gas-consuming industries, absence of uniform taxation with various states having different VAT rates, separation of pipeline ownership and marketing, slow pace of approvals, etc. Additionally, competition from electric vehicles, especially for the state transport bus segment and hydrogen, would also increase going forward.
Natural gas, crude oil and other petroleum products (MS, HSD, and ATF) are currently outside the GST purview. These products are subject to excise duty levied by the Central Government and VAT levied by the state governments. There has been a long-standing demand from the industry to include these under the GST regime to enable the free flow of input tax credits and avoid stranded taxes.
Currently, two-wheelers and buses are prime targets for electrification. Wider penetration of electric vehicles (EVs) remains contingent upon battery cost, availability of charging infrastructure, range anxiety, and resale value being addressed. There are some technical challenges that need to be overcome and costs that need to be lowered for meaningful penetration of alternative fuels/electric cars in developing countries including India. These technologies are likely to impact substantially towards the end of this decade. Many fuels could co-exist – viz., gas, LNG, hydrogen, and liquid fuels besides EVs; however, growth patterns would be disrupted for traditional fuels.
Global efforts towards transitioning to low-carbon energy will gradually lower the demand for petroleum products in the coming decades. Accordingly, the carbon transition risk for the domestic oil and gas industry will play out over the distant future.
[1]The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia are known collectively as OPEC+
