By Prashant Vasisht, Senior Vice President and Co-Group Head, ICRA Limited
The role of the hydrocarbon sector is vital in maintaining India’s economic growth momentum. Domestic crude oil consumption has increased to 262.5 million metric tonnes (mmt) in 2023-24 from 174.5 mmt in 2012-13, rising at a CAGR of 3.8 per cent, while the domestic production of crude oil has declined to 29.4 mmt from 37.9 mmt during the same period. At present, only 12 per cent of the country’s crude oil needs are met from domestic markets, while 88 per cent of the requirements are met through imports, entailing a substantial import bill. The demand for crude oil is expected to increase by 3-4 per cent in 2024-25 and will continue to rise over the next several years. However, growth in domestic crude oil production is expected to be limited, due to which the dependence on imports is likely to remain high. Domestic gas consumption has increased to 187.9 million metric standard cubic meters per day (mmscmd) in 2023-24 from 147.7 mmscmd in 2012-13, whereas domestic production has declined to 99.6 mmscmd from 111.4 mmscmd over the same period. While domestic gas output is expected to increase to 106-107 mmscmd in 2024-25 and 113 mmscmd in 2027-28, dependence on the imports of liquefied natural gas (LNG) is expected to remain high.
Gas consumption in the country is expected to grow by 6-8 per cent on a year-on-year (YoY) basis in 2024-25, driven by a strong uptick in the offtake by 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 coming years. The fertiliser sector will continue to remain the anchor consumer, accounting for nearly 31 per cent of the total gas consumed in the country in 2023-24. The city gas distribution (CGD) sector is expected to witness a healthy growth of 8-10 per cent on a YoY basis in 2024-25, supported by favourable gas allocation policies, growing compressed natural gas vehicle sales and rising network penetration. The gas consumption in 2024-25 is expected to grow at a modest pace of 6-8 per cent, with the power sector likely to witness sluggish growth in natural gas offtake while the fertiliser sector’s gas consumption is likely to peak at around 60 mmscmd during the year. Gas consumption by other sectors, which include the refinery and petrochemicals sectors, is expected to grow by 7-9 per cent on a YoY basis in 2024-25.
Evolving regulatory framework
Historically, the government has controlled the prices of domestically produced natural gas. From April 2023, it revised the pricing formula for the administered price mechanism (APM) gas, which is now determined on a monthly basis at approximately 10 per cent slope to the monthly average price of the Indian crude oil basket. For current gas production from the APM nomination fields of Oil and Natural Gas Corporation Limited and Oil India Limited, a floor price of $4 per mmBtu and a ceiling price of $6.5 per mmBtu (initially) have been prescribed, with an annual $0.25 per mmBtu increase in the ceiling price from 2025-26. With crude oil prices expected to stay around $65 per barrel (bbl) due to the active management of supplies by OPEC+ (Organisation of the Petroleum Exporting Countries plus a group of other oil-producing nations), APM gas prices are expected to stay at the ceiling over the medium term.
As per the schedule stipulated in the Hydrocarbon Exploration and Licensing Policy/Open Acreage Licensing Policy (OALP), eight bidding rounds have been finalised so far. The OALP Bid Round IX, offering 28 blocks covering an area of approximately 140,000 square. km, was opened for bidding on January 3, 2024.
To attract capital investments in oil exploration and production, 100 per cent foreign direct investment (FDI) has been allowed under the automatic route. While FDI and participation from big oil companies in oil exploration and production are essential, given the high risks, very few global companies are likely to participate. This is because India has poor data on geological prospects compared to other countries. Additionally, some of the key issues hindering the development of the upstream sector include a high cess of 20 per cent advalorem currently, slow pace of approvals, stalled progress in several blocks due to 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 Directorate General of Hydrocarbons, and an increasing number of arbitration cases involving the administration of production-sharing contracts.
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 aviation turbine fuel (ATF), high speed diesel (HSD) and motor spirit (MS), which have been revised several times subsequently. Currently, the special additional excise duty on crude oil stands at Rs 6,000 per tonne (approximately $10 per bbl), which translates to an annual contribution of Rs 160 billion-Rs 180 billion to the Indian government in 2024-25.
Refining scenario
The domestic refining capacity is expected to increase from 256.8 million tonnes (mt) as of March 31, 2024 to 306 mt over the next four years. Hindustan Petroleum Corporation Limited, in a 74:26 joint venture (JV) with the Rajasthan government, is setting up a 9 million tonnes per annum (mtpa) greenfield refinery-cum-petrochemical complex at Barmer, Rajasthan, which is expected to be commissioned by 2024-25. Further, Chennai Petroleum Corporation Limited and Indian Oil Corporation Limited (IOC) have formed a JV for setting up a 9 mtpa greenfield refinery at Nagapattinam, Tamil Nadu, where operations are likely to commence in 2026. In addition to increasing the refining capacity, the downstream industry is setting up petrochemicals projects to diversify their revenues and de-risk from lower fuel sales over the long term.
Due to the closure of about 4 million bbl per day of refining capacity globally in calendar year (CY) 2020 and CY 2021, the refining sector benefited from strong margins during fiscal year (FY) 2022-FY 2024. With new refining capacities being commissioned, refining margins are moderating. ICRA estimates Singapore’s gross refining margin (GRM) for 2024-25 to be $4-$5 per bbl. Indian refiners have also been procuring Russian crude oil at discounted rates since mid-2022, which has boosted domestic refiners’ GRMs. Approximately 37 per cent of crude imports by India in FY 2024 were from Russia. However, with recent moderations in discounts on Russian crude oil, the Indian refiners’ GRMs will be impacted.
Developments in the natural gas market
In the gas sector, the Indian government has pushed for the establishment of trunk pipelines, connecting the east and the northeast regions, providing budgetary support through viability gap funding for the Urja Ganga and Indradhanush pipeline projects. Apart from this, the Petroleum and Natural Gas Regulatory Board has concluded the 12th round of bidding for CGD licences, which covered nearly the entire mainland, barring Mizoram.
There are several LNG terminals that are being set up, including at Jaigarh and Charra, along with the recently commissioned terminals at Dhamra and Mundra, which will increase competition in the market and allow greater choice to consumers. The LNG terminal capacity will increase from the current 45.6 mtpa to 66.5 mtpa in the next three to four years.
Indian companies have been scouting for long-term gas agreements for the past couple of years to ensure energy security in the country. Petronet LNG Limited has recently renewed its contract with RasGas Company Limited in Qatar, and GAIL (India) Limited and IOC have signed a couple of contracts. As a portion of the demand remains uncontracted and exposed to fluctuations in the spot LNG market, Indian players will seek to secure long-term supply purchase agreements with reliable suppliers with a proven track record in LNG project execution.
Persisting issues
Key issues hindering the development of the gas sector in India include the 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 value added tax [VAT] rates), separation of pipeline ownership and marketing and slow pace of approvals. Additionally, competition from electric vehicles, especially in the state transport bus segment, and hydrogen will 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 products under the GST regime to enable the free flow of input tax credits and avoid stranded taxes.
Global efforts towards the transition 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 long term.
