INDIA ELECTIONS: Refining capacity, crude output, storage to top new government's oil agenda

The growing belief in world oil markets that India will become the epicenter of demand growth will prompt the new federal government to prioritize refining and upstream investments, and expand oil storage facilities and crude import sources to dilute the impact of growing geopolitical turbulence, analysts and trade sources said.

At the same time, the new government will have to step up diplomatic efforts to ensure robust ties with its traditional oil suppliers -- such as the Middle East and the US -- amid the growing footprint of Russian oil. It will also be under pressure to quickly find ways to keep domestic fuel prices under check amid rising global crude prices.

"An exponential rise in oil demand will pose big challenges for the external balance, with spillover impacts on the domestic economy," said Priyanka Kishore, director and principal economist at Asia Decoded, a Singapore-based research consultancy.

"As the economy continues to develop, more industrialization occurs and consumer spending on vehicles and other durable goods increases, the new government will have to take care that the gains in oil efficiency are not reversed," she added.

According to the International Energy Agency, 1 million b/d of new refinery distillation capacity would be added in India over the next seven years -- more than any other country in the world outside of China.

However, state refiners' expansion programs in India, which currently has an overall annual refining capacity of 254 million mt, would increasingly focus on boosting conversion ratios from crude to petrochemicals to about 10%-15%, from around 4%-5% currently, government officials said.

"Petrochemicals will get increasing prominence as part of India's oil strategy. This will be one of the key areas of focus," said one senior Indian oil industry source.

According to S&P Global Commodity Insights, Indian oil demand is expected to grow from about 4.5 million b/d in 2023 to as high as 5.54 million b/d in 2030. Refiners are increasingly embracing petrochemical ventures as part of a broader strategy to position themselves for sustained growth in the event energy transition and electric vehicles hit demand for transport fuels.

Upstream dream

On the upstream segment, India is accelerating its push to ensure energy security at a time when geopolitical turbulence and clean fuels are altering the global energy landscape. But analysts and trade sources are of the view that New Delhi has an uphill task at hand.

Upstream output has been declining nearly 1.1% on a compound annual rate over the past 10 years due to a natural drop in mature fields, as well as due to a lack of monetization of existing discoveries and a reduced number of new discoveries, according to Commodity Insights.

"Steady growth in upstream investments will be crucial for India to embrace a new energy landscape that is uniform in approach and has a place for all types of fuels to ensure a just transition," said Ranjit Rath, chairman and managing director of state-run upstream producer Oil India Ltd.

The case for oil storage

On the oil storage segment, India's total petroleum storage capacity is much lower than the levels held by some members of the IEA.

India's vulnerability is apparent, especially in the face of recent disruptions, such as those witnessed in the Red Sea, and heightened tensions in the Middle East. This underscores the need for strategic measures and investments to enhance the country's energy resilience and mitigate risks associated with external dependencies, according to analysts.

"India will have to accelerate the second phase of petroleum storage expansion to cushion the impact of any potential trade flow disruptions, given what we are seeing in the world," said H.P.S. Ahuja, former CEO of Indian Strategic Petroleum Reserves Ltd.

India has a strategic petroleum reserve capacity of 5.33 million mt, providing for about 9.5 days of total net oil imports. In addition, state oil companies hold storage facilities for crude oil and petroleum products for 64.5 days of total net imports. Hence, the current total capacity for the storage of crude oil and petroleum products stands at 74 days of total net imports, according to a parliamentary panel report.

IEA member countries are required to ensure oil stock levels equivalent to no less than 90 days of their net imports. For the second phase, India has drawn up plans to augment storage capacity further by creating an additional 6.5 million mt, which will add another 12 days of oil storage requirements.

Analysts said this would be a priority for the new Indian government as New Delhi has sought full membership of the IEA.

Changing trade flow map

Prior to the Russia-Ukraine conflict, more than 60% of the Indian crude basket was made up of Middle Eastern crudes, with North America, West Africa and Latin America being the other major contributors. But in 2023, Russia contributed about 40% of India's total crude imports, rising from as low as 5% in 2019, and snatching away market share from other leading supplying regions, according to Commodity Insights.

But in 2023, Russia contributed over 35% of India's total crude imports, amounting to 1.7 million b/d, prompting a slowdown in inflows of African and Middle Eastern crudes, according to Commodity Insights.

"India's reliance on Middle Eastern crude exports has reduced considerably in recent years, with Russia emerging as the top crude supplier. However, Iraq, Saudi Arabia and the UAE collectively still account for over 45% of total imports by volume and play a very important role for the country's crude diet," said Rajat Kapoor, managing director for oil and gas at Synergy Consulting.

"Having such a large volume of exposure in an area that threatens to turn into a theatre of conflict does not bode well for India. The country will not only have to navigate a market of higher-than-normal prices but also confront the genuine possibility of supply-side disruptions affecting cargoes originating from the Middle East," he added.

Economic fallout

Rising geopolitical tensions and oil price volatility after the pandemic have not dented the Indian economy's resilience, Dharmakirti Joshi, chief economist for India at CRISIL, part of S&P Global, said.

A transitory spike in crude oil prices is not as much of a worry now as India is currently running a relatively narrow current account deficit (CAD) and has ample foreign exchange reserves as well as low core and fuel inflation, he said.

But if crude oil prices rise substantially and stay elevated, then the high prices would become a concern and it would be crucial for the new government to manage the situation effectively.

"A $10/b rise in the crude oil price can push up the CAD to GDP ratio by 40 basis points and trim GDP growth by about 20 basis points," he added.

Over the years, the government's petroleum subsidy burden has declined sharply after the prices of many products were decontrolled. The government also resorted to direct benefit transfer to disburse cooking gas subsidies to citizens.

Consequently, the fiscal impact of high crude oil prices is much lower now, Joshi said.

"Pertinently, oil and gas prices have been kept out of the purview of the Goods and Services Tax. Their inclusion will be a tough task for the bipartisan GST Council as that will require complex consensus-building across states in a federal political system," Joshi added.