Growth Prospects

Outlook for the refining segment

India has a total refining capacity of 232.07 million tonnes (mt), and in 2015-16, this capacity exceeded demand, which stood at 183.5 mt. The public sector accounts for a majority share (59 per cent) in total refining capacity, while the private sector accounts for the remaining 41 per cent. Among the private sector players, Reliance Industries Limited (RIL) holds the distinction of having built the biggest refinery in the country till now. Its first refinery, built in Jamnagar, Gujarat, had a capacity of 27 mt, which was subsequently expanded to 33 mt.

Recent plans

In order to transition to cleaner forms of energy and meet the rising demand for fuel, various initiatives are being undertaken in the oil and gas sector.

Roadmap for raising refining capacity

With India’s oil demand projected to more than double in 25 years, the government has formed a working group to prepare a blueprint for raising refining capacity. According to Paris-based International Energy Agency, fuel demand in the country is forecasted to reach 458 mt by 2040. The rise in projected demand paves the way for a gradual shift towards renewable and cleaner fuels richer in hydrogen or to neat hydrogen. Expansions that are under way will raise refining capacity to about 260 mt by 2018.

The working group will assess the likely technological developments in different energy fields and develop a primary energy mix in terms of gas, oil, coal, nuclear, solar, hydro and biofuels. It has been envisioned that the energy mix in 2040 could be entirely different from what it is today. Also, new capacities in petroleum refining will depend upon aggregation of demand from different petroleum-derived products, which itself depends upon substitution by other forms of energy and government policies. The working group, with a three-month tenure, will prepare an approach paper for capacity expansion by state-owned refiners.

In order to feed the booming fuel demand, Indian Oil Corporation Limited (IOCL) has unveiled plans to spend about Rs 400 billion ($6 billion) to boost capacity by almost 30 per cent by 2022. It aims to increase its capacity to about 104 million tonnes per annum (mtpa) by expanding existing refineries across the country.

Biggest oil refinery

State-run refiners IOC, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) and Engineers India Limited have joined hands to set up India’s biggest oil refinery to be located on the west coast at an estimated cost of $30 billion. The 60 mtpa refinery and a mega petrochemical complex will be set up in two phases. The refinery will produce petrol, diesel, liquefied petroleum gas, aviation turbine fuel and feedstock for petrochemical plants providing inputs to plastic, chemical and textile industries in Maharashtra. The refinery will include three crude units of 20 mt each and being situated on the west coast will provide a natural advantage of easily sourced crude oil from the Middle East, Africa and South America.

In Phase I, 40 mt of refining capacity will be developed along with an aromatic, naphtha cracker and polymer complex. It will cost about Rs 1.5 trillion and will come up in five to six years from the date of land acquisition. Phase II is estimated to cost Rs 500 billion.

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Upgrade to Euro-VI

In a bid to curb vehicular pollution, India will directly leapfrog from Bharat Stage (BS)-IV (equivalent to Euro-IV)-complaint petrol and diesel to BS-VI fuel by 2020. Oil refineries, both public and private, will need to invest Rs 800 billion in upgrading petrol and diesel quality to meet the cleaner fuel specifications. Public sector oil refiners IOCL, BPCL and HPCL will be required to invest a total of Rs 300 billion-Rs 350 billion over the next four years to produce auto fuels that will comply with BS-VI emission norms. The move reiterates the government’s commitment to reduce the country’s carbon footprint.

Outlook

Falling oil prices seem to have bottomed out, raising hopes of better margins for oil refiners. Crude oil prices jumped to an eight-month high of over $50 a barrel in June 2016, indicating an easing in the supply glut and avoiding inventory losses for 2016-17. Going forward, as the price of crude oil stabilises, oil marketing firms in the country are expected to post better numbers. Moreover, initiatives such as the Smart Cities Mission and the manufacturing boost expected from the Make in India campaign will drive the country’s oil appetite in the coming years.

In the next few months, as refiners and marketers profit from burgeoning gasoline demand on the back of strong car and two-wheeler sales and an expected resurgence in energy consumption growth led by manufacturing, they need to become more environmentally responsible as well.

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