Indian refiners redraw products strategy to sail through energy transition wave

India's refinery expansion plans are gaining speed after a year of subdued activity, but refiners are redrawing their strategy to ensure there is plentiful downstream integration that would provide flexibility in switching to different products in the event the energy transition wave takes a toll on transport fuels in coming years.

Although India's peak oil demand is nowhere near, refiners will have to adopt a different strategy and boost their ability to produce a wide variety of petrochemical products, while shedding their overdependence on transport fuels, such as gasoline and gasoil, according to analysts as well as speakers attending the S&P Global Platts Asian Refining Virtual Summit last week.

"The traditional business of oil and gas is undergoing a big change. The energy transition process will bring a big challenge for refiners. There will be more and more integration," Prasad Panicker, director of refineries at Nayara Energy, told the Platts summit. "India's oil demand growth will continue for one or two decades. But by the time electric vehicles come and take over a major share of demand, refiners would have to remain prepared through more integration and diversified products."

Nayara Energy -- after closing a $12.9 billion takeover deal by Rosneft, Trafigura and UCP in 2017 spelled out its first big expansion strategy in 2019 by announcing a foray into petrochemicals. The proposed first phase of asset development for the Vadinar refinery entails an investment of $850 million for setting up a 450,000 mt/year polypropylene plant and a 200,000 mt/year MTBE plant.

Not just Nayara, but other state-run and private refiners such as refiners Indian Oil Corp. and Reliance Industries are drawing up plans to make sure petrochemicals remain a big part of their oil footprint. Analysts say India's petrochemicals growth over the next few years would remain above annual GDP growth rates.

Integration with petrochemicals

The International Energy Agency recently said that India is set to witness the biggest increase in energy demand in the world over the next 20 years, with the potential for oil consumption rising as high as 4 million b/d at 8.7 million b/d by 2040. But a much stronger push for electrification, efficiency and fuel switching could limit oil demand growth to less than 1 million b/d over the same period.

"Since we are going to witness refining overcapacity in Asia and around the world over the next couple of years, it's difficult to justify refinery-only expansions. However, petrochemicals demand will continue to grow and so will demand for petrochemical feedstocks," said Kang Wu, head of global macro demand and Asia analytics at S&P Global Platts.

"For a large consumer like India that is highly dependent on imports of oil and petrochemical feedstocks, refinery-petrochemical integration is a better strategy to pursue to meet the growing as well as diversified demand," he added.

India's minister for Petroleum and Natural Gas and Steel Dharmendra Pradhan told the South Asia Platts Virtual Forum in February that with the country's oil demand expected to double by 2040, India would look to boost refining capacity from the current 250 million mt/year to 450 million mt/year.

"India is building a strong and expanded refinery capacity. This means that we are going to see major competition among India, China and the Middle East in the crude market in coming years," Ulf Henning Richter, research associate at the Oxford Institute for Energy Studies, told the summit.

Demand is back, margins are not

India's demand for gasoline had surpassed pre-pandemic levels amid increased preference to use own vehicles to commute and avoid public transport. Gasoil, on the other hand, was also close to pre-pandemic levels, indicating a strong revival in industrial activity, Panicker said.

Platts Analytics expects India's oil demand in 2021 to recover to slightly above the level of 2019, with growth of 480,000 b/d in the year, after declining 470,000 b/d in 2020.

While demand revival had offered a pleasant surprise for refiners, encouraging most refiners to operate close to 100% of their capacities, refining margins were still languishing and would take time to come back to pre-pandemic levels, Panicker added.

The FOB Singapore 92 RON gasoline crack spread against front-month ICE Brent crude futures averaged $4.13/b to date in the first half of 2021, staging a rebound from the average crack spread of $2.47/b in H2 2020 and $1/b in H1 last year, but still sharply lower than the $7.36/b average seen before the outbreak of the pandemic in H2 2019, Platts data showed.

"There are still some challenges refiners in India are facing -- such as non-availability of some crude grades, product cracks are still low and crude markets are volatile," he added. "It will take a while before margins get normalized. We are hoping that the aviation sector will open up in the next three to five months."