Recovery on the Cards

Demand expected to pick up in the oil and gas sector

The oil and gas sector is among the eight core industries in India. The country’s economic growth is closely related to the growth of the energy sector. Thus, the government has been undertaking a gamut of initiatives to meet the country’s ever-increasing energy requirements and make the sector attractive for investment. It has allowed 100 per cent foreign direct investment (FDI) in a number of segments, including natural gas, petroleum products and refineries. At present, it attracts both domestic and foreign investment.

In spite of the initiatives taken, the country continues to rely heavily on imports for both oil and gas. In addition, the recent months, marked by the first and second waves of the Covid-19 pandemic, have thrown open a new set of challenges for the industry. That said, there has been some demand revival, although gradual.

Indian Infrastructure tracks various trends and developments that have shaped the sector over the past year and the road ahead…

Production and consumption landscape

India has high import dependence for oil and gas. About 85 per cent of the country’s crude oil and 50 per cent of natural gas needs are met by imports from countries including Qatar, Saudi Arabia, the UAE and Iran. The domestic output has been consistently falling year on year owing to ageing fields, lacklustre exploration activity, equipment issues and deeper levels of reserves.

Domestic oil production in India reduced from 36.94 million tonnes (mt) in 2015-16 to 30.49 mt in 2020-21. At the same time, the consumption of petroleum-based products increased from 184.67 mt to 194.63 mt, registering a compound annual growth rate (CAGR) of 1.06 per cent. While imports have been consistently increasing, they stood at 198.11 mt during 2020-21, a 12.71 per cent decline over the previous year (226.96 mt).

The natural gas scenario is quite similar. Natural gas production fell from 32,247 million metric standard cubic metres (mmscm) in 2015-16 to 28,670.6 mmscm in 2020-21. At the same time, consumption increased from 52,517 mmscm to 60,645 mmscm, at a CAGR of 2.92 per cent. The increasing consumption has been met through rising liquefied natural gas (LNG) imports, which have increased from 21,388 mmscm to 32,861 mmscm during the 2016-21 period at a CAGR of 8.97 per cent.

Increased investments in the sector

According to the Department for Promotion of Industry and Internal Trade Policy, the petroleum and natural gas sector attracted FDI worth $7.91 billion between April 2000 and December 2020.

In February 2021, in order to meet the increasing demand, Petronet LNG announced its plans to increase the capacity of its Dahej terminal by 29 per cent to 22.5 million tonnes per annum (mtpa). Besides, Indian oil retailers such as Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) have announced plans to increase the capacity of their outlets in rural areas in 2021. Meanwhile, the Oil and Natural Gas Corporation has announced its plan to increase the natural gas output from a KG basin block to 2.5 million-3 million standard cubic metres per day.`

Further, the government has launched key oil and gas projects in Assam, such as the INDMAX Unit at Indian Oil Corporation Limited’s (IOCL) Bongaigaon refinery; a gas compressor station at Hebeda village, Makum and Tinsukia remotely from Dhemaji in Assam; and Oil India Limited’s secondary tank farm at Madhuban, Dibrugarh. The government has also launched key oil and gas projects such as the Ramanathapuram-Thoothukudi natural gas pipeline and a gasoline desulphurisation unit at Chennai Petroleum Corporation Limited, Manali. The 144 km Ramanathapuram-Thoothukudi pipeline will transport fuel to fertiliser manufacturing and petrochemical units near the coastal town from the gas fields in Ramanathapuram. The project has been executed at an investment of Rs 7 billion to bring 8 mmscm of natural gas per day to Thoothukudi along with a compressor station at Valantharavai village in Ramanathapuram district.

IOCL has also signed a statement of intent with Greenstat Hydrogen India Private Limited to establish a centre of excellence for the hydrogen value chain and other related technologies such as hydrogen storage and fuel cells. The development is expected to facilitate the transfer and sharing of technology, know-how and experience through the green hydrogen value chain and other relevant technologies. Meanwhile, as the country looks to reduce its reliance on oil imports by 10 per cent by 2022, foreign investors will have several opportunities to invest in projects worth $300 billion in the country.

Government’s push

The government has taken many initiatives to promote the oil and gas sector in the country. Recently, in February 2021, the government announced its plans to invest around Rs 7.5 trillion ($102.49 billion) in oil and gas infrastructure over the next five years.

The Ministry of Petroleum and Natural Gas (MoPNG) has released a draft LNG policy, which aims to increase the country’s LNG re-gasification capacity from 42.5 mtpa to 70 mtpa by 2030 and further to 100 mtpa by 2040. The MoPNG has also released the Ethanol Procurement Policy under the Ethanol Blended Petrol Programme (October 2019). The policy covers the modalities for long-term ethanol procurement, and proposes the pricing methodology and mechanisms for long-term procurement contracts.

Under the Union Budget 2021-22, the government allocated funds worth Rs 124.80 billion for direct benefit transfer of liquefied petroleum gas (LPG) and Rs 10.78 billion for feedstock subsidy to Brahmaputra Cracker and Polymer Limited/the Assam Gas Cracker Complex. It announced another Rs 10 million for LPG connections under the Pradhan Mantri Ujjwala Yojana. Meanwhile, the state-run energy firms BPCL, HPCL and IOCL have planned to spend funds of around $20 billion on refinery expansions by 2022.

The government has laid plans to set up around 5,000 compressed biogas plants by 2023. It is also planning to invest $2.86 billion in the upstream oil and gas production to double natural gas production to 60 billion cubic metres and drill more than 120 exploration wells by 2022.

Future outlook amidst Covid-19

The domestic demand for petroleum products was hit hard during Covid-induced lockdowns, declining to 40-50 per cent of pre-Covid levels. However, with the gradual easing of lockdown restrictions and the revival of economic activity, the demand for most fuels has been increasing.

According to credit rating agency ICRA, in 2021-22, the demand for petroleum products is expected to increase at a healthy rate of 8-10 per cent vis-à-vis 2020-21, in line with the economic growth and pick-up in industrial activity. The country’s energy demand is anticipated to grow faster than the energy demand in other major economies on the back of continuous robust economic growth. India’s energy demand is expected to increase from 753.7 million tonnes of oil equivalent (mtoe) in 2017 to 1,516 mtoe by 2035. Crude oil consumption is expected to increase from 221.56 mt in 2017 to 500 mt by 2040, recording a CAGR of 3.6 per cent.

Further, India’s oil demand is projected to grow at the fastest pace in the world to reach 10 million barrels per day by 2030, from 5.05 million barrels per day in 2020. Natural gas consumption is anticipated to increase from 58.1 mt in 2018 to 143.08 mt by 2040, at a CAGR of 4.18 per cent.

Net, net, the outlook for the oil and gas sector remains positive although it is subject to the post-Covid recovery rate. The demand will increase as a significant market potential still remains untapped. While the supply side is dependent on imports, it is expected to reduce once current exploration activities gather pace.

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