By aiming to become a global refinery hub, India can turns its disadvantage of inadequate oil and gas production into an advantage, with few countries planning greenfield refineries due to environmental concerns.

The country’s refining capacity has increased from a modest 62 million tonne annually in 1998 to 254 MMTPA.

But, India imports 85 per cent of its crude oil supply. According to S&P Global Commodity Insights, India’s oil products demand increased 398,000 barrels a day, or 8.2 per cent, year-on-year and 8,000 barrels a day month-on-month in January (2024) on the back of higher consumption of all products except fuel oil.

To make India a refinery hub, there is a need to secure long-term crude oil supply, given the domestic demand-supply mismatch. In fact, the target set by Prime Minister Narendra Modi to reduce import dependence by 2023, has long been missed.

Speaking at the ‘Urja Sangam’ conference in March 2015, Modi had urged all stakeholders to increase the domestic production of Oil and Gas to reduce import dependence from 77 per cent to 67 per cent by 2022, the 75th anniversary of Indian independence. He further said that import dependence should be brought down to 50 per cent by 2030.

On February 6, in his address at inauguration of India Energy Week 2024, Modi said “Additionally, we have solidified our position as one of the largest refiners globally, with our current refining capacity surpassing 254 MMTPA. By 2030, we aim to elevate India’s refining capacity to 450 MMTPA.”

Why is the government keen on making India a refinery hub?

The likely reason is that western countries may not increase refining capacity due to climate pressure, so India can tap this opportunity to supply to them.

According to Ellen R. Wald, President of Transversal Consulting and author of “Saudi, Inc.”, “China pursued this strategy and it worked well for them. They have many independent refineries that export refined products across Asia. India is in a good position because it can import Russian crude oil, refine it into products and sell those products to Western European consumers who cannot buy Russian refined products due to sanctions.”

Those in refinery business see it as a balance between import and export of crude oil and petroleum products. Though major global refiners are currently not spending much in new projects and older refineries having almost lived their lives, India can become a supplier to the world. “Basically, the balance of payment will be in our favour,” said an observer.

Demand growth

Premasish Das, Executive Director, Head of Oil Market Downstream Research - Asia, Middle East, Africa & CIS at S&P Global Commodity Insights, said “India is one of the major economies in the world where total oil demand is expected to grow through 2045. In our view, India’s refined products demand is expected to grow from 5.4 million barrels per day (MMb/d) in 2022 to about 8.1 MMb/d in 2045 (i.e., an increase of about 50 per cent), almost reaching the peak demand.

“In comparison, the demand growth in China and the world is likely to peak in this decade and is forecast to decline by about 18 per cent and 8 per cent respectively, by 2045 from their peak demand. So, it is imperative that India needs to add refining capacity to meet the domestic oil demand.”

However, as some of the products constituting the oil demand, such as LPG and ethane, are mostly imported, new refinery capacity additions should be lower than the demand growth, he said adding that “In our view, we expect that about 1.5 MMb/d of new capacity additions from 2022 to 2045 is required to meet the domestic and export requirements.”

So how does India create a balance without disturbing its fiscal math, as clearly we are more dependent on fossil fuels than before?

Since greenfield refineries need long gestation period, will banks/FIs extend loans for them?

According to Das, “It is correct that India’s import dependency for crude oil has been growing with the decline in domestic production and refinery capacity additions. It has increased from around 80 per cent in 2010 to around 90 per cent in 2022 and is expected to increase over the forecast period… It is important to note that India is one of the major exporters of refined products with a net export close to 1 MMb/d in 2022. In theory, if India reduces its product exports, the crude oil import dependency can be lower, but this is not a straightforward decision because of potential significant socio-economic impacts.”

“As such, we expect the net exports of refined products will reduce over the forecast period owing to a decline in demand in the other parts of the world, particularly the matured economies, and difficulty in justifying new refining capacity additions in a world where demand is declining from the later part of this decade,” he said.

Higher import dependency is definitely posing energy security challenges, however, some of that is driven by the domestic demand growth and is likely to be a “must-have”, he added.

India’s options

So what should India do?

Reviving domestic oil production, use of biofuels, and EV focus, while improving strategic relationships with the major oil producers, and developing strategic storage.

Das cautions, “If new refining capacity additions are focused on export markets, that may not help the situation and further challenge the net zero ambitions. If we look at Mainland China, the country has restricted refined product exports and is managing the refinery capacity additions to address the energy security concerns and net zero ambitions. The country has developed a large strategic and commercial crude oil inventory as well to address the geopolitical challenges.”

But India cannot follow China’s path, given its growth, jobs and fiscal pressures. The way out for India is to strike a balance between its diplomatic positioning and economic interests, while looking at all sources of energy generation. There has to be a consistent long-term strategy.