After slipping into the red for the first time in nearly two decades, oil is fast returning to a starring role in India.
The country, where the love affair with cars and two-wheelers is intense, is set to see oil demand bounce back strongly in 2021 and beyond, helped by fiscal stimulus as it leaves COVID-19 in its rearview mirror.
New Delhi is no doubt stepping up efforts and incentives to embrace the energy transition process, offering hope for solar and other cleaner forms of energy. However, a dramatic shift away from fossil fuels will be slow going.
The latest report by the International Energy Agency clearly highlighted the role oil might play not only in the near term, but over the next 20 years.
The IEA said India is set to witness the biggest increase in energy demand in the world over the next two decades, with the potential for oil consumption rising as much as 4 million b/d to 8.7 million b/d by 2040, under one scenario. 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.
Domestic production of oil and gas continues to fall behind consumption trends, and net dependence on imported oil could potentially be above 90% by 2040, up from 75% today, the agency noted, noting continued reliance on imported fuels creates vulnerabilities to price cycles and volatility, as well as possible disruptions to supply.
Similar comments emerged in early February at the S&P Global Platts South Asia Commodities Virtual Forum. Speakers said India's peak oil demand would come much later than what the rest of the world might anticipate, creating enough room to pursue refinery expansions and secure crude supplies through diversification drives.
However, oil's importance to India's needs may not necessarily be a risk, since energy security goes both ways.
India is unabashedly reliant on oil and is a key buyer of crude from big suppliers like Saudi Arabia and Iraq, while the OPEC producers equally depend on India's appetite for Middle East grades. The relationship is mutually beneficial, and the ties between India and top producers are only getting closer.
Middle East oil producers are eying projects in India that would help them expand their footprint in the country.
Although delayed, the plan for a 1.2 million b/d mega-refinery joint venture between Indian state refiners and Saudi Arabia's state-owned behemoth Saudi Aramco and the United Arab Emirates' national oil company ADNOC are still in place.
A potential Aramco joint venture with Reliance Industries could get back on track in 2021. Reliance has received clearance to raise the export capacity of its export-focused Jamnagar refinery by 17% to 820,000 b/d and aims to hit close to 2 million b/d by the end of the decade. With a guaranteed supply of heavy sour Saudi crude into the plant, it would be a win-win.
Domestic demand rebound
India's own appetite for road fuel, namely diesel and gasoline, is set to come roaring back. S&P Global Platts Analytics sees the economy growing 9.3% this year after contracting 7.7% in 2020, as vaccines help return life closer to normal and a $35 billion package designed to improve employment and industry provides a timely boost.
Platts Analytics expects India's oil demand in 2021 to recover to the level of 2019, with growth of 470,000 b/d in the year, after declining 470,000 b/d in 2020.
Diesel demand will be the biggest driver as the energy-intensive industrial sector recovers quicker, assisted by a rebound in the commercial vehicle segment.
With diesel accounting for about 40% India's oil products basket, the demand recovery has already provided enough reason for all state-run and private refiners to lift operating rates to around 100% capacity.
Gasoline output, a notable sidekick to diesel in India, has also shown strong signs of life, climbing to a 14-month high in December.
Jet fuel will remain the laggard. Airlines in the country are likely to continue to function well below capacity, especially for international flights, which are currently 60% below pre-pandemic levels.
India may be making the right noises regarding efforts to slowly wean itself off crude, but that's easier said than done.
The country aims to roll out a road map for hydrogen and provide incentives to attract private sector investment as New Delhi looks at ways to scale up production and reduce costs to make the fuel affordable to end-users.
India's green ambition comes as the push toward embracing hydrogen gains speed. Some of the country's top energy companies—such as Indian Oil Corp., Reliance Industries and Adani Group—are increasingly highlighting the urgency to move toward the carbon-free fuel, which they say has an edge over other non-fossil fuel sources.
But the importance of revenues from fuel taxes, the plans already in place to develop refineries and a growing population suggest any move away from oil will have to be carefully managed.
The Indian government has repeatedly said it is committed to reducing its carbon footprint sharply in coming years to battle climate change, and its closer collaboration it agreed in January with the International Energy Agency is a positive step. But India only needs to look at its counterparts in Europe striving to clean up its energy mix to realize the size of the challenge. India's fossil fuel use at about 76% is on a par with Germany, according to IEA statistics.
With India's oil demand set to expand, so will the traffic jams in the gridlocked streets of Delhi and Bangalore. In addition, the furor around India's fuel taxes may also come to the surface again, and questions will intensify about energy transition and cleaner fuels.
India and China are pivotal in supporting oil prices, and those prices, currently hovering around $60/b, will also start to be felt across the country.
Therein lies the price of recovery. But for now, the return of oil will be very welcome.