Syllabus
GS Paper 3 – Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth. Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
Context
The International Energy Agency (IEA) has recently published a report on the outlook of the Indian oil market up to 2030. This comprehensive report delves into the potential changes in India’s position in the global oil market over the next decade.
Historical Background of India’s refinery sector
- The establishment of the first oil refinery in India took place in Digboi, Assam, in 1901. The primary focus was on catering to local demand for kerosene and lubricants.
- Post-1947, the government initiated measures to set up more refineries to cater to the escalating demand for petroleum products.
- The Indian Oil Corporation was established in 1958, symbolizing the nationalization of the refining sector. Additional refineries were set up in Mumbai, Barauni, and Visakhapatnam.
- The oil crisis of the 1970s spurred India to strive for self-sufficiency in the oil and gas sector.
- The New Economic Policy of 1991 paved the way for the refining sector to be opened up to private investment and foreign collaborations.
- Energy demand is projected to grow at about 3% per annum by 2040, outpacing the global rate of 1%. Moreover, India is expected to account for 25% of the global energy growth between 2020 and 2040, owing to its rapidly expanding economy and demographic dividend.
The Oil and Natural Gas Company (ONGC), a Maharatna company, is the largest entity in India in terms of crude oil and natural gas, contributing approximately 75% to India’s domestic production.
Key Highlights of the Report
- India’s Dominance in Oil Demand Growth
- India is anticipated to outpace China by 2027 and become the largest contributor to global oil demand growth by 2030.
- The country’s oil demand is expected to increase by about 1.2 million barrels per day (bpd) by 2023, accounting for over a third of the projected global demand growth of 3.2 million bpd by 2030.
- By 2030, India’s total oil demand is projected to reach 6.64 million bpd, up from 5.48 million bpd in 2023.
- This growth is driven by the country’s robust economic growth, population increase, and demographic changes.
- Growth in Fuel Demands
- Diesel/gasoil is projected to be the largest source of oil demand growth in India, accounting for nearly half of the country’s demand increase and over one-sixth of total global oil demand growth through 2030.
- Demand for jet-kerosene is expected to grow strongly, at around 5.9% per year on average. The demand for petrol in India is projected to grow by 0.7% on average, as the electrification of India’s vehicle fleet curbs a more substantial increase.
- Gasoline demand is expected to grow modestly due to the electrification of India’s vehicle fleet, while LPG demand is projected to increase due to investments in production facilities.
- Crude Oil Imports
- India’s crude oil imports are forecasted to increase by over a fourth to 5.8 million bpd by 2030 due to strong oil demand growth and declining domestic production.
- Currently, India relies on imports for over 85% of its oil needs. India is the third-largest consumer of crude oil, trailing only the US and China, with domestic consumption around 5 mb/d according to oil ministry data.
- Investment in Refining Sector
- Indian oil companies are making significant investments in the refining sector to meet the rising domestic oil demand.
- Over the next seven years, 1 mb/d of new refinery distillation capacity will be added, which is more than any other country in the world outside of China.
- Several other large projects are currently under consideration that may increase capacity beyond the 6.8 mb/d capacity expected so far.
- Role in Global Oil Markets
- India is expected to maintain its role as a key exporter of transportation fuels to markets in Asia and the Atlantic Basin.
- India’s role as a global swing supplier has increased since 2022 due to the loss of Russian product exports to European markets, which has increased the pull of Asian diesel and jet fuel westward.
- In 2023, India was the fourth-largest exporter of middle distillates globally and the sixth-largest refinery product exporter at 1.2 mb/d.
- New refining capacity is expected to boost product supplies to global markets to 1.4 mb/d through mid-decade before decreasing to 1.2 mb/d by 2030 due to the steady rise in domestic demand.
- Biofuels in Decarbonisation
- Biofuels are expected to play a key role in India’s efforts to decarbonise the transport sector. India is already the world’s third-largest producer and consumer of ethanol, with domestic production having tripled over the last five years.
- Supported by the country’s abundant feedstocks, political support, and effective policy implementation, its ethanol blending rate of around 12% is among the world’s highest. India has advanced its deadline for doubling nationwide ethanol blending in gasoline to 20% in Q4 2026 by five years.
- However, achieving 20% ethanol blending in such a short time frame presents several challenges, including rapidly expanding feedstock supplies.
- Efforts in Energy Transition
- The increased uptake of Electric Vehicles (EVs) is set to play a key role in decarbonising the transport sector. It is estimated that combined, new EVs and energy efficiency improvements will avoid 480 kb/d of extra oil demand in the 2023-2030 period.
- Without these gains, India’s oil demand would reach a much higher 1.68 mb/d by 2030 compared with the current forecast.
Status of India’s refinery sector
- Self-Sufficiency: From a deficit scenario in 2001, India has achieved self-sufficiency in refining and is now a major exporter of quality petroleum products.
- Global Refining Hub: With a refining capacity of 248.9 Million Metric Tonnes Per Annum (MMTPA), India is the 4th largest in the world, following the United States, China, and Russia.
- Export: In 2020-21, India was the largest exporter of petroleum products in Asia.
- Future Target: India plans to double its oil refining capacity to 450-500 million tonnes by 2030.
- Foreign Direct Investment: 100% FDI is permitted in the automatic route for strategic disinvestment, exploration of all oil and natural gas fields, and infrastructure related to the marketing of petroleum products and natural gas.
- Energy Consumer: India is the 3rd largest energy and oil consumer in the world and the 4th largest importer of liquefied natural gas (LNG).
Significance of refinery sector
- Energy Security: Refineries play a pivotal role in ensuring energy security by processing crude oil into various petroleum products such as petrol, diesel, kerosene, and LPG, thereby meeting the country’s growing energy demands.
- Employment Generation: The refinery sector creates employment opportunities, both directly and indirectly, throughout the entire value chain, from exploration and production to refining, distribution, and retail.
- Infrastructure Development: The establishment of refineries leads to significant infrastructure development, including pipelines, storage facilities, and transportation networks, contributing to the overall economic development of the regions where the refineries are located.
- Reduction in Import Bill: Refining domestically reduces India’s dependence on importing refined petroleum products, thereby saving foreign exchange. It allows the country to meet a substantial portion of its demand for refined products.
- Industrial Growth: The refinery sector serves as a foundation for the growth of downstream industries, such as petrochemicals, fertilizers, and various manufacturing sectors, promoting industrial growth.
- Technological Advancements: Continuous improvements and investments in technology contribute to the production of cleaner fuels, compliance with environmental regulations, and the adoption of sustainable practices. The production of Bharat Stage VI (BS-VI) fuels helps reduce vehicular emissions.
- Strategic Importance: A diverse and well-distributed refinery network helps mitigate risks associated with supply chain disruptions, ensuring a stable and secure energy supply.
- Improvement in Exports: The refinery sector enables the country to produce high-quality fuels that comply with international standards, thereby improving its participation in the global energy market.
Challenges in refinery sector
- Crude Oil Price Volatility: The sector is highly susceptible to fluctuations in global crude oil prices. Sudden and unpredictable price changes can impact the profitability of refineries and their ability to offer competitive prices for refined products.
- Infrastructure Deficit: A lack of adequate infrastructure, such as pipelines, storage facilities, and transportation networks, can lead to logistical challenges in the supply chain.
- Environmental Compliance: Strict environmental regulations necessitate refineries to invest in advanced technologies to reduce greenhouse gas emissions and produce cleaner fuels.
- Geopolitical Risks: Global events like the COVID-19 pandemic and the Russia-Ukraine war have impacted the global oil market and the refining industry, causing supply shortages, price volatility, and capacity reductions.
- Capital-Intensive Nature: The sector is capital-intensive. Securing funding for new projects, expansions, and modernization can be challenging, especially for smaller players in the industry.
- Policy Paralysis: Frequent changes in government policies and regulations can create uncertainty for the refinery sector. Regulatory stability is crucial for long-term planning and investments, and uncertainties can affect decision-making and project implementation.
- Demand Fluctuations: Economic uncertainties, global events, and changes in consumer behavior can lead to fluctuations in the demand for refined products.
- Supply Chain Disruption: Private refineries, in particular, have benefited from high global product prices and increased their exports while curtailing supplies to the lower-priced domestic market. This has led to supply chain disruptions.
Way forward
- Refining and Petrochemical Hub: India should continue its journey towards not only being a refining hub but also a refining-petrochemical hub.
- Integrated Projects: There is a need for integrated projects that can produce both fuels and petrochemicals, with the flexibility to adjust output according to market demand.
- Large-Scale Projects: India should construct large-scale projects that can compete globally and generate export revenues.
- Geopolitical Relationships: India should utilize its geopolitical relationships with major oil producers to secure a long-term crude oil supply.
- Oil Stock Holding Levels: India’s current oil stock holding levels provide a net-import cover for 66 days, with Strategic Petroleum Reserve (SPR) stocks covering seven days.
- IEA Membership: While India is an associate member of the IEA, full member countries maintain a stockpile equivalent to 90 days of their demand.
- Response Capacity: India needs to enhance its capacity to respond to potential oil supply disruptions by strengthening its SPR Programmes and improving oil industry readiness.
- Strategic Petroleum Reserves: Strategic petroleum reserves play a crucial role in mitigating the impact of emergencies, such as wars, on energy supplies.
Source: Economic Times
Practice Question
Discuss the evolution and significance of the refinery sector in India. Analyze the challenges it faces and suggest measures for its sustainable growth. Substantiate your answer with relevant examples. [250 words]