By Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA Limited
The hydrocarbon sector plays a vital role in keeping the economy running. However, oil and gas supplies have been deeply affected by the geopolitical tensions in West Asia. The war, which began in February 2026, rapidly spread to multiple countries in the Gulf region, affecting maritime traffic through the Strait of Hormuz. Although a ceasefire agreement in June 2026 led to a partial recovery in regional oil flows and shipping activity, hostilities resumed mid-July 2026, renewing concerns over regional stability and resulting in continued conflicts and elevated supply disruption risks. In July 2026, the Houthis’ blockade prompted some vessels to reroute and raised freight and insurance costs. While large-scale disruption has been avoided, the strait remains a key geopolitical risk for global oil trade.
Previously, the strait allowed passage of almost 20 per cent of global oil supplies and traded liquefied natural gas (LNG). Post the commencement of hostilities, shipping through the strait reduced to a trickle. As a result, Brent crude prices, which hovered within $65-$70 per barrel for the most part of FY 2026, jumped to above $100 per barrel and breached $120 per barrel in the weeks following the outbreak of war. Crude prices eased to $85 per barrel in June-July following the US-Iran ceasefire, but rose to above $90 per barrel in August amid renewed supply concerns.
Unplanned liquid fuel outages jumped to a peak of around 16.2 million barrels per day (mbd) in May 2026 from around 2.1 mbd in February 2026, because of the Hormuz closure. Global oil production dipped by around 10 per cent to 97.5 mbd in June 2026 from 108.7 mbd in February 2026. Nevertheless, demand declined by only about 3 per cent to 101.4 mbd from 104.3 mbd. As per the International Energy Agency (IEA), global liquid fuel consumption is expected to fall by 1.6 mbd to 102.4 mbd in 2026 from 104 mbd in 2025 even as global supply is expected to reduce by 4.3 mbd in 2026, with 8.3 mbd of West Asian crude still shut in. As per the Energy Information Administration, the Strait of Hormuz disruption is expected to reduce OPEC output to 18.4 mbd in 2026 from 25.5 mbd in 2025. However, non-OPEC production is projected to increase to 66.6 mbd from 63.4 mbd, partially offsetting the decline. The IEA announced a 400 mb stock release, with around 290 mb (accounting for 73 per cent of the total stock announced) already deployed, easing near-term supply tightness. Global oil inventories decreased sharply to approximately 7.81 billion barrels in May 2026 from 8.2 billion barrels in February 2026, reflecting significant stock drawdowns amid West Asia-related supply disruptions.
The Indian oil and gas sector has been heavily impacted by the country’s huge reliance on West Asia for sourcing both crude oil and LNG. In FY 2025, about 50 per cent of India’s crude oil and 54 per cent of LNG imports were routed through the Strait of Hormuz. In March 2026, following the war in West Asia, the US announced a 30‑day waiver, allowing India to offload stranded Russian crude cargoes. The waiver was extended in April 2026, and again in May 2026. As per the latest development, the validity has been extended from May 16, 2026 to June 17, 2026. No further extension has been announced thereafter. Considering the waivers given by the US, India’s purchase of crude oil from Russia has surged.
The conflict in West Asia and the closure of the Strait of Hormuz exposed the economy’s vulnerability to oil supply shocks. In July 2026, the Ministry of Petroleum and Natural Gas (MoPNG) approved the National Offshore Exploration Scheme, Samudra Manthan, with an outlay of Rs 840.84 billion for implementation through FY 2031, to boost domestic oil and gas production. The scheme aims to add incremental annual production of 10-15 million tonnes of oil equivalent, which would reduce dependence on oil and gas imports but only to the extent of 3-5 per cent.
To incentivise production, in May 2026, the MoPNG has reduced the royalty on offshore crude oil production to 8 per cent from 9.09 per cent and natural gas to 8 per cent from 10 per cent. Deepwater and ultra-deepwater fields awarded under the Discovered Small Fields Policy and the Hydrocarbon Exploration and Licensing Policy will attract zero royalty for the first seven years of crude oil, condensate and natural gas production. After seven years, the royalty rates for these blocks will be 5 per cent and 2 per cent respectively.
India imports more than 50 per cent of its natural gas requirement. The closure of the Strait of Hormuz has disrupted supplies from Qatar and the UAE. To reduce import dependence, the union cabinet approved the Galvanising Organic Bio-Agro Resources Dhan (GOBARdhan) scheme, with a total outlay of Rs 237.31 billion, on August 6, 2026. The scheme will be implemented from FY 2027 to FY 2036, and will provide capital assistance of Rs 20 million per tonne per day of plant and infrastructure set-up. As compressed biogas (CBG) plants are often located in the hinterland, the scheme provides support for pipeline infrastructure connecting CBG plants with trunk pipelines and city gas distribution (CGD) networks. Under this scheme, a dedicated credit guarantee mechanism will provide credit guarantee coverage of up to 85 per cent on eligible loans for such projects.
On the domestic front, crude oil consumption increased to 268.5 million metric tonnes (mmt) in FY 2026 from 205.2 
mmt in FY 2016, indicating a CAGR of 2.7 per cent, while the domestic production of crude oil declined to 28 mmt from 36.9 mmt during the same period. At present, only 10 per cent of the country’s needs are met domestically, while 90 per cent of the domestic crude requirement is met through imports, entailing a huge import bill. The demand for crude oil is expected to remain stable in FY 2027, but will continue to rise over the next several years. However, the growth in domestic crude oil production is likely to be limited, leading to high dependence on crude oil imports.
Domestic gas consumption increased to 189.2 million metric standard cubic metres per day (mmscmd) in FY 2026 from 147.7 mmscmd in FY 2013, whereas domestic production declined to 94.04 mmscmd from 111.4 mmscmd over the same period. While domestic gas production is likely to remain stable in FY 2027 and 96 mmscmd in FY 2028, the dependence on LNG imports is expected to remain high. Most of the incremental gas production would come from the Krishna-Godavari basin fields of the Oil and Natural Gas Corporation.
Gas consumption in the country is expected to grow marginally in FY 2027, amid supply constraints, driven by the ongoing West Asia crisis. The fertiliser sector remains the anchor consumer, accounting for nearly 29 per cent of total gas consumption in FY 2026. The CGD sector is likely to see a healthy year-on-year growth of 8-10 per cent in FY 2027, driven by continued healthy offtake under the compressed natural gas segment and increase in domestic piped natural gas (PNG-D) offtake as more domestic connections get energised. The PNG-industrial segment is also anticipated to witness a healthy uptick in consumption amid elevated alternative fuel prices and constrained commercial liquefied petroleum gas (LPG) availability.
The domestic refining capacity is expected to increase to 315 million tonnes over the next five years from 267.1 million tonnes as on March 31, 2026. Hindustan Petroleum Corporation Limited has recently commissioned its 9 million metric tonnes per annum (mmtpa) greenfield refinery at Barmer, Rajasthan. Chennai Petroleum Corporation and Indian Oil Corporation formed a joint venture to set up a 9 mmtpa greenfield refinery at Nagapattinam, Tamil Nadu, with operations likely to commence in 2026. Additionally, Bharat Petroleum Corporation Limited is considering setting up a greenfield refinery-cum-petrochemical complex in Andhra Pradesh.
The gross refining margins have surged because geopolitical conflicts and attacks on Russian refineries resulted in about 10 mbd of refining capacity going offline. However, with the spike in crude oil prices, marketing margins for oil marketing companies dipped and price hikes were implemented for auto fuels and domestic LPG.
Regarding the gas sector, the government has pushed for the setting up of trunk pipelines connecting the eastern and north-eastern regions through budgetary support in the form of viability gap funding for the Urja Ganga and Indradhanush pipelines. Apart from this, the Petroleum and Natural Gas Regulatory Board has concluded the 12A bidding round for CGD licences, which essentially covered nearly the entire country. Several LNG terminals are being set up, including those at Jaigarh and Gopalpur. The recently commissioned terminal at Charra and capacity expansion at Petronet’s Dahej terminal are expected to increase competition in the market. LNG terminal capacity is expected to rise from 58.5 mmtpa at present to over 70 mmtpa over the course of the next three to four years. While near-term gas consumption growth is expected to remain subdued, with several new urea plants likely to be set up under the recently announced policy, LNG consumption is anticipated to rise materially. This will support increased gas flows through some of the LNG terminals going forward.
Some of the key issues hindering the development of the gas sector in the country are the lack of pipeline connectivity across the country, especially in the eastern and southern parts; regulated realisations/product prices of natural gas-consuming industries; the absence of uniform taxation, with different states having different VAT rates; the separation of pipeline ownership and marketing, and the slow pace of approvals. Further, competition from electric vehicles, especially in the state transport bus segment, and hydrogen would increase going forward.
Natural gas, crude oil and other petroleum products (MS, HSD and ATF) are currently outside the GST purview. 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, including the electrification of vehicles, will gradually dent 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 distant future.
