Will oil sector growth lead to more capex for underfunded ministry

For a sector that accounts for 15 per cent of India’s gross domestic product (GDP) and 26 per cent of the revenue receipts of the Central and state governments, India’s petroleum ministry is woefully underfunded. 

The petroleum sector contributed Rs 4.32 trillion to the Central exchequer by way of taxes, royalties, and dividends, among others, and Rs 3.19 trillion to the states in 2023-24, according to an oil ministry document. That is adequate to almost cover the combined federal government spending on pension, defence, and health. Fuel exports contributed 11 per cent to India’s total exports by value last financial year and the country’s major oil and gas companies contributed around 10.75 per cent of India’s GDP, government data shows. 

On the other hand, the oil ministry received Rs 1,128.97 crore towards capital expenditure in its Budget estimates (BE) for 2024-25, as against Rs 35,508.98 crore in 2023-24, only 3.17 per cent of the budgeted estimates in 2023-24, according to government documents. A Rs 30,000 crore grant offered for energy transition plans of state oil companies and a Rs 5,000 crore allocation for filling the country’s strategic reserves were shelved. 

For 2023-24, the ministry received Rs 12,240 crore in subsidies for LPG, budget documents show. A parliamentary report says the government must enhance capital expenditure substantially in the upcoming Budget for 2025-26, because the wheel of India’s economy will continue to be greased by oil and gas for the foreseeable future. 

“Import dependency of the crude oil and natural gas of the country is very high and the same is a big concern for the energy security of the country,’’ says the Standing Committee on Petroleum & Natural Gas in a December 2024 report on Demand for Grants. “In order to achieve the long-term goal of securing energy security, the country needs to make large capital investments.’’ 

India imports nearly nine out of every 10 barrels it consumes, and half of its gas needs. Also, the oil and gas sector is a large employment generator. 

But of greater concern is the inability of state-owned oil companies to make huge investments. Check these numbers. The Internal and External Budgetary Resources (IEBR) allocation towards capital expenditure of oil PSUs in the current fiscal is estimated to be Rs 1.18 trillion, which is a reduction of Rs 18,322 crore in the estimated allocation from the actual capital expenditure of Rs 1.37 trillion last fiscal, and of the same level as the actual capital expenditure of Rs 1.19 trillion in 2022-23. 

Oil secretary Pankaj Jain told Business Standard at an event in Delhi late last year that the government had not postponed construction of new refineries. He categorically denied any hurdles in building grassroot refining and chemical projects. He said the current refining capacity was adequate to meet fuel demand now. 

“Indian oil companies have been prompt in putting up refineries for fuels,’’ says Prashant Vasisht, Senior Vice President and Co-Group Head, corporate ratings, at ICRA, a US Moody’s affiliate. “But capex can be increased on petrochemicals and chemicals and renewable energy owing to carbon transition risks in line with global peers.” 

Bhanu Patni, Associate Director, India Ratings & Research, says: “Oil and gas producers are likely to continue spending on new field developments and maintaining output from existing fields. Refiners, especially oil marketing companies, are also focusing on capacity build-up, debottlenecking, and petchem capex with the lower gross refining margins offset by better marketing margins at the current retail prices.’’ 

 

       

Fuel Use  Unlike China, India will need oil and gas for a much longer duration to power its economy, international forecasters say. The US Energy Information Administration forecasts that India will be the biggest demand driver for oil in 2024 and 2025, adding 280,000-300,000 barrels per day annually — a view seconded by the Paris-based International Energy Agency, which downgraded China’s demand outlook while retaining India’s. 

New Delhi-based think tank TERI in a recent report outlined gasoline demand to peak by 2044-45 at 94 million tonnes of oil equivalent (toe) if the government successfully electrifies 30 per cent of its passenger fleet by 2030.  

Diesel demand is expected to peak at 234 million toe by 2056–57, giving Indian refiners more than two decades to recoup their investments. 

India is in a position to build new refining capacity, said Amrita Sen, head of research at London-based research agency Energy Aspects, at the India Energy week in Goa last year, anticipating net global refining capacity to expand by 500,000 bpd annually from 2026-30, compared with oil demand growth of at least 1 million-1.5 million bpd each year, adding to a deficit of transportation products. 

“In view of the fact that the demand for petroleum products has been increasing continuously during the last 10 years, the committee feels that the country needs to find more crude oil and gas resources and create additional refining capacity and distribution infrastructure to meet growing demand. Further, oil PSUs need to invest more in energy transition projects to meet net zero commitments,'' says the parliamentary standing committee’s report. 

After a long hiatus, Indian companies are reviving plans for three new grassroot refineries with roughly 600,000 bpd of combined capacity. A need for new facilities has come after a surge in fuel and chemical use coupled with a slower-than-expected growth rate for cleaner fuel vehicles. Bharat Petroleum is assessing two newbuild refineries with roughly 360,000 bpd of combined capacity, while state-run explorer Oil & Natural Gas Corp is weighing options for a 240,000 bpd facility in Gujarat, industry sources say. India’s current refinery additions will total 1.06 million bpd by 2028, increasing the country’s total refining capacity to 6.2 million bpd, according to the oil ministry.

 

Project delays 

But project delays are a matter of concern. They prevent refiners from utilising their budgeted capex. 

Indian Oil’s Paradip refinery, India’s last big greenfield project, was conceived during Prime Minister Atal Bihari Vajpayee’s government. It was commissioned during Prime Minister Narendra Modi's first term.  

Similarly, state-owned refiner Hindustan Petroleum’s upcoming 180,000 bpd refinery in Barmer in Rajasthan is expected to begin commissioning this June, after at least a year's delay. Ashok Gehlot, former chief minister of Rajasthan, said in a tweet that when he visited the refinery in June 2023, top officials had assured him that commercial production would start by December 31 that year. The project has been in the works since 2013. 

Indian Oil’s 180,000 bpd grassroots refinery project in Nagapattinam in Tamil Nadu faces delays of up to two years due to difficulties in securing investors and higher costs. Indian Oil had increased its stake to 75 per cent to execute the project, it said in an exchange filing last year. 

Similar delays are noticed in state-run explorer Oil India’s Numaligarh Refinery project. It was to be completed by 2024, but has been pushed to December 2025-March 2026. Oil India plans to treble its capacity to 9 million tonnes a year at an estimated investment of more than Rs 28,000 crore. Such delays needed to be avoided, the parliamentary report said. 

India’s energy security is also at risk by a lack of spending on strategic storage. The government denied Rs 5,000 crore to oil companies for refilling the existing three rock caverns with a combined capacity of 5.33 million tonnes, around 10 to 11 days of India’s fuel consumption. The caverns are around 67 per cent full, according to the report, which is hardly a week of India’s consumption. 

The oil ministry said there was no provision to fill crude oil reserves this financial year but a provision will be made in the 2025-26 budget. The Committee has told the oil ministry to maintain the optimum level of Indian Strategic Petroleum Reserves and take up the matter of allocation of adequate budget with the finance ministry, given the current geopolitical scenario, especially that of regions that are major suppliers of crude oil. 

“The capital expenditure of the ministry and oil PSUs is not sufficient to meet and manage the surge in demand of petroleum products in the country and achieve net-zero targets,’’ the committee observed in its report. It found the capital 

expenditure in the current financial year inadequate to achieve the long-term goal of energy security and recommended an increase.