Striking the balance: India’s energy security, affordability and sustainability

Q&A with Mansi Madan Tripathy, Country Chair for Shell India and Vice President 35 of Shell Lubricants APAC

Rising demand raises concerns about crude oil supply. India has historically seen energy security through the lens of physical supply security, which has always been the focal point of energy conversations. This extended to “supply, but at what cost?” when prices spiked or stayed elevated, but the core notion of the physical supply of crude oil was always in the background. Thus, every effort in the first 15 years of the 21st century was made to secure physical supply. Indian companies, led by national oil companies, invested in upstream assets internationally, buying US$13.6 billion of assets before 2014, according to S&P Global Commodity Insights data. While this acquisition activity grew by US$6.5 billion after 2014, it was centered on government-to-government relationships, primarily in Russia, with a significant corporate-led pullback from upstream expansion.

This “securing supply” strategy has slowly turned into an “offer the market, not the bid” strategy. Historically, Indian national oil companies would talk up the potential of the market back home when bidding for upstream assets, offering themselves as constructive upstream partners because of the scale of India’s oil market. However, this has given way to securing supply contracts and reducing the bidding for underlying assets. In the upstream industry, securing supply is increasingly being replaced by securing supply contracts.

The mantra of India’s 2024 general election was continuity for the oil and gas industry. While arguments can be made that continuity is yielding diminishing returns, with limited foreign and private equity in India’s upstream sector, new strategies are being thought up to restructure the sector by 2030. These include aggressively expanding open acreage, investigating frontier areas and creating partnership models for developing discoveries. One underappreciated idea is to create a Production Linked Incentive (PLI) scheme to accelerate production and challenge the upstream sector to support the economy’s fast-growing needs and slow down India’s 90% (and rising) dependence on imported oil.

India’s import dependence affects its energy security and, given the associated price volatility, impacts oil affordability, leading to higher fiscal deficits. Consequently, India adopted a diversification strategy for oil imports to mitigate geopolitical issues and risks related to supply choke points. This strategy was being developed before the Russia-Ukraine conflict began and focused on increasing US crude oil import volumes.

Then the Russia-Ukraine conflict triggered perhaps the biggest rebalancing of global oil flows in the past few decades, with Russia becoming the top crude oil exporter to India when discounted Russian barrels found a home with opportunistic Indian refiners. This strategic move provided near-term affordable oil security and made Indian refiners accustomed to processing crude oil such as Urals. Russia is still the top exporter to India, with imports in June 2024 surpassing the high levels of July 2023. Furthermore, trade between the two countries is being facilitated by innovations in shipping and payment mechanisms.

This change in oil flows has helped India diversify from Middle Eastern crude oil. India now buys 30% less oil from the region compared with before the Russian invasion. The flip side is that India’s relationships with emerging stable suppliers beyond the Middle East, such as the Americas and West Africa, have weakened, leading to volume shrinkage. This could be troubling if the economics of importing Russian oil begin to no longer make sense. For now, chasing affordability has solved India’s diversification and supply security problems. It remains to be seen whether this solution is sustainable.

India’s strategic petroleum reserves (SPRs) represent another attempt to resolve the energy security question. If scaled up, SPRs could be a buffer against supply disruptions and volatile global oil markets. However, at 9.5 days of national demand cover, according to the Ministry of Petroleum and Natural Gas, the current SPR program will need to expand significantly. While phase two of the program should allow 48 million barrels to be stored — about 18 days of national demand cover — the pace of budgetary allocations, investments, utilization of past allocations and construction needs to be accelerated.

India’s energy security strategy is increasingly focused on alternative fuels, with natural gas as a substitute for petrol, and ethanol playing a pivotal role in blending. The rising use of ethanol has supported a reduction in fossil-based gasoline reliance, leading to lower crude oil imports. This shift should enhance domestic supply and reduce dependency on volatile global oil markets, ensuring significant savings on foreign exchange expenditure.

India has made significant strides in ethanol blending with gasoline, achieving a 15% average blend rate, and is looking to meet a 2025 target of 20% on an accelerated timeline. Many retail stations have already begun selling 20% blended gasoline. All of this was made possible by the government’s push to expand feedstocks for ethanol production, new ethanol production plants, lucrative ethanol prices and fiscal support.

However, India’s biodiesel program remains miniscule, and the absence of meaningful quantities of domestic feedstock is the biggest impediment. India’s dependence on seed oil imports would potentially skyrocket if lucrative and nonnegotiable blending targets were set. The country’s curious lack of used cooking oil (UCO), the most popular biodiesel production pathway in Asia, can be attributed to policy sensitivities around higher cooking oil imports, which again highlights the interplay between affordability and security.

Regarding sustainable aviation fuel, India has opted for the ethanol-to-jet fuel route to meet import substitution criteria, despite this being very expensive compared with the UCO route. The country’s policy focus on compressed biogas is also an ethanol blending corollary targeting imported LNG.

Government policies and initiatives promoting biofuel use aim to reduce fossil fuel use by the equivalent volume, thereby lowering crude oil imports and enhancing energy security through increased domestic production.

The penetration of alternative powertrains in India’s vehicular fleet is gaining momentum, affecting the demand for traditional transportation fuels such as gasoline and diesel. Battery-electric vehicles (BEVs) are at the forefront of this shift, supported by hybrid and flexible fuel vehicles. These offer lower emissions and enhanced efficiency, aligning with India’s environmental objectives. The influx of BEVs, particularly in the two- and three-wheeler categories, has impacted gasoline demand more than diesel demand. 

The electric vehicle market in India is closely tied to the development of charging infrastructure. Major oil retailers in India have played a significant role in expanding this charging infrastructure. By promoting electrification in the transportation sector, India is looking to reduce its dependence on crude oil imports. 

Compressed natural gas (CNG) and hybrid vehicles have also proven to be effective transitional alternatives, particularly in the car segment, bolstered by government initiatives promoting natural gas. CNG car penetration reached 16% in 2023 and is anticipated to rise as compact car buyers increasingly favor them over traditional internal combustion engine vehicles. The recent introduction of CNG bikes in India could further accelerate CNG adoption in the two-wheeler category, potentially reducing oil demand in the transportation sector.

According to data from S&P Global Mobility’s AutoTechInsight platform, Indian demand for EV lithium batteries is anticipated to grow by a multiple of 35 from 2023 to 2035, driven predominantly by the light-vehicle segment. This necessitates a stable and efficient battery supply chain, balancing domestic production with international partnerships to foster robust EV market expansion.

Historically reliant on imports from mainland China, South Korea and Japan, India is now focusing on local manufacturing through the PLI scheme and related government policies. Original equipment manufacturers are investing in local production facilities such as Ola’s electric two-wheeler gigafactory. Major players such as Reliance and Adani are planning to establish lithium-ion battery cell factories in India and evaluate alternative chemistries such as sodium-ion. Meanwhile, joint ventures such as Suzuki’s collaboration with Toshiba are poised to enhance India’s production capabilities and technological expertise. These are just small steps in the pursuit of Atmanirbhar Bharat, or a self-reliant India, catering to energy security with a nod to sustainability.

To solve India’s challenges of ensuring an energy supply that is secure, affordable and sustainable, it is vital to accelerate biofuel blending, especially sustainable aviation fuel, compressed biogas and biodiesel, while ensuring ethanol blending continues to grow. India also needs to bring flexible fuel vehicles into the fleet mix, ramp up its sustainable e-mobility ecosystem and provide financial incentives to increase EV penetration. Finally, the country must make domestic exploration and production above-ground risk terms aggressively competitive, pursue high-quality overseas upstream investments, scale up the construction and filling-up of its SPRs, and continue to push for cleaner and alternative energy sources.