OMCs set to invest over Rs 2 trillion to meet India’s growing oil demands | News
India’s oil marketing companies (OMCs) are gearing up to enhance their crude oil refining capacity by an estimated 35-40 million tonnes by the end of the financial year 2029-30, as they seek to accommodate the surging energy demands of the nation. This development is outlined in a recent report by Crisil Ratings, which also indicates a projected capital expenditure ranging from Rs 1.9 trillion to Rs 2.2 trillion for these capacity additions, primarily through brownfield expansions.
According to Crisil, the additional refining capacities will elevate India’s total installed refining base to 295 million tonnes by 2030. The focus on brownfield expansions, which involve upgrading existing facilities rather than building new ones, is expected to mitigate project risks. This strategy comes amid fluctuating oil prices, where refiners have managed to achieve rolling average returns of $9-11 per barrel from fiscal years 2016 to 2024, resulting in a return on investment of 12-14 per cent.
Rising demand for petroleum in India
The demand for petroleum products in India has been steadily rising, with domestic consumption registering a compound annual growth rate (CAGR) of 4 per cent over the past decade. In this period, India’s refining capacity increased from 215 million tonnes to 257 million tonnes. Transport fuels, which account for 56 per cent of total consumption, also grew by 4 per cent, while naphtha, making up 7 per cent of consumption, saw a growth rate of 2 per cent. Additionally, the combined consumption of liquefied petroleum gas and bitumen increased by nearly 4 per cent.
Looking ahead, Anuj Sethi, Senior Director at Crisil Ratings, anticipates that overall petroleum product consumption may moderate slightly, predicting a 3 per cent CAGR over the next six years. This deceleration is expected to stem from slower growth in transport fuel consumption, projected to be between 2-3 per cent. Factors influencing this trend include improvements in fuel economy, an increasing share of alternative cleaner fuel vehicles, and the Indian government’s target for 20 per cent ethanol blending in fuels.
The report indicates that project risks associated with these investments are likely to be low, which, combined with steady return expectations, will bolster the credit risk profiles of OMCs.
In 2023, India ranked as the fourth-largest exporter of middle distillates globally and the sixth-largest exporter of refined products, reaching 1.2 mb/d. The anticipated new refining capacity is expected to boost product supplies to global markets, projected to rise to 1.4 mb/d through the middle of the decade, before stabilising at 1.2 mb/d by 2030 due to the consistent increase in domestic demand.
The IEA has highlighted India as the largest contributor to global oil demand growth over this forecast period, driven by robust economic and demographic expansion. Currently, India’s refining capacity is estimated at approximately 5.8 million barrels per day and is set to expand by an additional 1 mb/d by the end of the decade, largely spearheaded by public sector undertaking (PSU) refineries.
Three major state-owned OMCs—Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation—are actively implementing plans to increase their refining capabilities. Beyond catering to domestic needs, these refineries also aim to serve export markets.
Crisil further noted that OMCs may seek to enhance their refining capacities in conjunction with their petrochemical expansion strategies, aiming to diversify their business portfolios. However, the successful execution of capital expenditure and the subsequent returns will require careful monitoring as the sector evolves.
First Published: Sep 28 2024 | 12:04 PM IST
