Energy supplies the key to 'Make in India' success: Fuel for Thought

India's Narendra Modi-led National Democratic Alliance in late 2014 launched the 'Make in India' campaign. The aim is to replicate the export-led growth of the Asian tigers between 1965 and 1990 and then later China, by raising the manufacturing sector's share of the GDP to 25% by 2025 from 16% currently.

The push to expand manufacturing will trigger a massive demand for oil, gas and other resources. The government must secure its long-term energy and resource needs as the country is heavily dependent on imported feedstocks and is vulnerable to external supply shocks and price fluctuations.

Energy supply security will be critical to India realizing its 'Make in India' dream.

The Asian tigers and then China were able to boost manufacturing because their goods were competitive at a time of rapid expansion in international trade. India is unlikely to be able to emulate this as the external trade environment is no longer as conducive to such a strategy.

As a result, India has to look at its domestic market as much as export markets for dynamic growth.

As India invites multinationals to set up manufacturing units in the country, the government needs to make sure policies and incentives are in place that enable them to produce goods competitively. It must ensure that the planned multi-billion dollar improvements in infrastructure are delivered, and growth is not stifled for lack of energy resource availability.

The task is no doubt gigantic, but so is the prize.

India's crude oil demand is expected to rise by just over 7% in 2017 and at a Compound Average Annual Growth rate of 5% between 2015 and 2020 to 5.2 million b/d, according to estimates by CRISIL, a Mumbai-based analytics company, majority owned by S&P Global.

This growth will be driven by higher demand for oil products as average incomes rise and the government builds out its strategic petroleum reserve. India is expected to take overall SPR capacity to more than 15 million mt (111 million barrels) by 2020.

Oil products demand is expected to grow annually by 5.5% over the next five years, according to PIRA Energy, a unit of S&P Global Platts. Demand is forecast at around 5.9 million b/d in 2021, up from a projected 4.74 million b/d in 2017, according to PIRA.

Products demand averaged 4.2 million b/d in Q1 2017, according to official oil ministry data. At a refining capacity of 4.66 million b/d, the country has been a net exporter of refined products. Forecasts by the International Energy Agency and others suggest India's refining capacity will rise to 7.7 million b/d by 2030, which should leave some spare export capacity despite rising domestic demand.

THREE-PRONGED APPROACH

Large gains in domestic oil production are not expected, increasing the country's already sizeable dependence on crude oil imports. The country is chronically dependent on imports, which account for over 80% of demand.

Despite new policies to boost domestic oil production, exploration activity is too low to result in a major increase in output. Domestic oil production fell from 916,000 b/d in 2011 to 876,000 b/d in 2015.

Lack of local production is by no means a barrier to success, as Japan and South Korea have shown, but the economy's vulnerability to external supply shocks will be a critical concern for the government.

Delhi is pursuing three main policies in this regard. It will encourage domestic production; diversify lines of supply and build strong relationships with key suppliers; and attempt to raise the share of Indian companies' overseas oil production.

In early 2016, the government unveiled its long-awaited Hydrocarbon Exploration Licensing Policy, which aims to attract more investment in the upstream sector. The policy moves away from a cost-recovery model to a revenue-sharing one and includes a uniform licensing system that covers conventional and unconventional hydrocarbons. It also features an "open acreage policy" that allows companies to evaluate and define the areas they want to bid for.

Externally, oil minister Dharmendra Pradhan has been actively courting India's top crude suppliers, offering them a range of quid pro quo deals, such as investment in refineries in Nigeria and a strategic crude storage deal with the UAE, in order to strengthen supply chain ties.

The government has also floated the idea of creating a few integrated state-owned oil companies by consolidating some of the existing ones to help them compete better in overseas markets.

With oil demand growth almost paralleling GDP growth, India is set to absorb increasing volumes of crude oil, but making sure this demand is met in a secure and stable way is critical to realizing the 'Make in India' dream.

S&P Global Platts recently took a comprehensive look at the cross-commodity challenges and opportunities in India. To read the full White Paper, go to: www.platts.com/make-india.