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India’s energy supply security is threatened by New Delhi’s overdrive to slash new fossil fuel production facilities while lagging behind on electric vehicle (EV) proliferation. The move also seems out of sync with evolving realities of energy use in a post-pandemic, post Ukraine world.
UK Prime Minister Rishi Sunak recently announced that the government would grant at least 100 new North Sea oil and gas licences, a stark turnaround for a nation which was an early proponent of clean energy measures. His policy shift echoes the turnaround in the stance of European oil majors, which are veering away from lower-return renewables to focus on their core fossil fuel businesses.
BP, this year, scaled back plans to cut oil output to 25 per cent from 2019 levels compared with previous plans for a 40 per cent cut. Shell plans to spend around $40 billion on upstream and trading between 2023-2025, while scrapping projects on offshore wind, hydrogen and biofuels.
The reversal towards fossil fuels is understandable. Last year, Exxon, Shell, Total, Equinor, Chevron and BP made adjusted earnings of a combined $223 billion, 6 per cent of India’s GDP. Shell’s new chief has said it will maintain oil output into 2030 and focus "on the highest returns that play to our strengths".
While India may not focus on returns like corporations, energy security and affordability is elemental to rapid, equitable and cheap economic growth, but the oil ministry’s latest plans involve a rapid exit from fuels without considering its implications on supply security.
Capacity increase numbers
Late last month, in reply to a parliament question, Rameswar Teli, minister of state at the oil ministry, said that India's refining capacity is projected to increase from its current level of around 5.1 million barrels per day to 6.2 million bpd by 2028. "This capacity is likely to be adequate to meet projected demand," Teli said, citing a report by Centre for High Technology (CHT), a technical wing of the oil ministry. The refining capacity of Indian refineries is projected to increase by 1.12 million barrels a day by 2028 to 6.2 million b/d from 5.08 million b/d today, Teli said. The numbers he cited amount to a capacity increase of just 22 per cent over the next five years.
The measly addition under the latest oil ministry forecast also leaves little for exports after barely meeting domestic fuel needs. Oil product is one of India’s biggest export earners at $57.3 billion in 2022/23, and a key contributor to the country’s economy and foreign exchange reserves.
"To continue being a refining hub and exporter of petroleum products, Indian refining capacity should be more than 400 million tons a year (8 million bpd) by 2030," said Sourav Mitra, a director at ratings agency Crisil, a unit of S&P.
The oil ministry’s projections will trail domestic demand for oil, leave little for exports and probably make India import fuels. Calculations by 'Business Standard' reflect a shortage of fuels if India pursues a conservative investment strategy for refining. Oil demand is expected to grow at a little over 4 per cent and reach 7 million b/d by 2030, Crisil estimated.
Diesel demand, which constitutes around 40 per cent of total oil use, grew by 12 per cent in 2022/23 fiscal from a year earlier, and the role of transport in diesel usage has grown to 81 per cent in 2021, with trucks accounting for the biggest chunk, a segment that cannot be easily converted to electric. India’s oil demand may reach 8.7 million b/d in 2040, the largest increase of any country, the International Energy Agency has said.
"As India's middle classes grow, demand for cars will take off even faster,'' said Tilak Doshi, a London-based energy expert, who has worked for Saudi Aramco, Arco and Unocal in senior positions. "EVs, biofuels and hydrogen are all side shows with little impact on any of these magnitudes. Biofuels are wasteful and expensive as it requires large agricultural resources to create ethanol at the expense of food,'' Doshi said.
Just six months back, at the India Energy Week, Prime Minister Narendra Modi exhorted Indian refiners to boost refining capacity by 4 million b/d. That statement was more in line with an oil ministry report in 2018, which projected refining capacity at 5.18 million b/d by 2020, 8.3 million b/d by 2025 and 8.8 million b/d by 2030.
What Modi prescribed for India’s oil sector also falls in line with India’s need for affordable fuels to meet a 7 per cent plus growth rate enroute to a $10 trillion economy.
“We expect oil demand to remain strong in India given the growth in economy coupled with the growing population. While the peak oil demand in developed countries could come in by 2028-2030, India’s peak oil demand may be reached by around 2040-45 indicating a continued increase in usage of oil,'' said Bhanu Patni, associate director, India Ratings & Research.
Oil demand
After adjusting for exports at current levels of around 61 million tons, India will need around 2.5-3 million b/d in additional refining capacity to meet consumption growth; alternatively, India may need to import fuels.
Ongoing additions include IndianOil adding 540,000 b/d year by 2025, including a 180,000 b/d greenfield refinery in Tamil Nadu. Hindustan Petroleum may complete a similar sized refinery in Barmer by 2026, while its Vizag refinery expansion of 300,000 b/d will be ready this year. The Numaligarh refinery in Assam will add 120,000 b/d by 2025 and Bharat Petroleum will add 80,000 b/d at Bina in five years.
Upcoming capacity of 1 million b/d may yield only around 600,000 b/d of fuels because around 25 per cent of the capacity from new refineries will be dedicated to petrochemicals, and another 10% used to run the refinery, said Mukesh Surana, former chairman, HPCL, and head of state-run Ratnagiri Refinery.
India’s downward revision of refining additions seems more in sync with the country’s first Energy Transition Report, prepared by an advisor to the Prime Minister, and issued in May, which recommended an aggressive phasing out of fossil fuels. The report, which is yet to be accepted by New Delhi, asked to eliminate diesel vehicles by 2027, and transition to clean-fuel public transport in 10 years. "Based on the long term growth trends in consumption of gasoline and diesel and increasing adoption of CNG, Bio fuels and EVs, this (refining) capacity is likely to be adequate to meet projected demand," Telli said. But India’s EV penetration rate as a share of new vehicle sales at 1.5 per cent is well behind UK’s 23 per cent, Europe’s 21 per cent and China’s 29 per cent, according to ICRA, a Moody’s affiliate.
India’s clean energy space is growing slower than expected. Renewables lag targets, while coal still fills in for 70 percent of generation, and the first fuel on call to power EVs this decade. Poorly designed subsidy policies and intense policing of payouts has also hurt EV output, with sales in 2023/24 likely to lag targets.
