Due largely to what analysts described as India’s rising income levels, an expanding middle class and a growing need for mobility, Wood Mackenzie says India is likely to come first before China as world’s largest oil demand centre by 2024.
“Amidst global attention on peak oil demand, India appears to be bucking the trend”, says Wood’s analysts. They maintain that the country’s oil demand will grow by 3.5 million barrels per day (b/d) from 2017 to 2035, accounting for one-third of global oil demand growth, a situation which is also a challenge to the country’s refining capability, as only 400,000 b/d of firm refinery capacity was programmed until 2023.
Sushant Gupta, research director at Wood Mackenzie has this to say: “From a balanced position today, Indian public sector undertakings (PSUs) or refineries owned by national oil companies will become short on transport fuels at least until the 1.2 million b/d mega refinery, a proposed joint venture among Indian PSUs, Saudi Aramco and ADNOC, comes online.
“So how much and how soon is the new refinery capacity needed in India? This depends on two main factors. First, the pace of oil demand growth and second whether private refiners would divert their large export volumes to the domestic market.
“We think the most likely situation is that India would need between 3.2 million b/d and 4.7 million b/d of new capacity out to 2035 to remain self-sufficient in transport fuels. So we are talking about a future capacity which is 1.7 to 2.0 times the current. This is clearly an uphill task, unless domestic refiners can commit to their planned capacity additions.”
For Wood Mackenzie, the so-much uncertainties around oil demand are the biggest risk to new refinery projects. Adding that factors such as GDP growth, road infrastructure developments, electrification of the transport sector and fuel efficiency improvements, could have very different implications for oil demand.
It was their view that a high demand scenario paired with no increase in private refiners supply to India could lead to substantial under-capacity, whereas a low demand scenario coupled with high diversion of private refiners’ exports to India would lead to over-capacity.
The other challenge they say will be around choosing the right refinery configuration, for new capacity in India needs to focus on increasing gasoline yields as gasoline to diesel demand ratio is expected to rise. Current refinery yields are highly weighted towards diesel they say.
While it is also their view that the world will be facing global surplus of gasoline in the longer term they advised that Indian refiners seriously considered their new capacity project strategies. For according to Woods, a high gasoline yield configuration required to align with domestic demand will result in sub-standard returns for investors which also impacts the pace of future refinery capacity additions.
“But they can still import products, particularly gasoline alternatively” Wood Mackenzie said, expecting the US and Europe to have a surplus of gasoline due to domestic demand declines. A situation which to the team of analysts could create a match between US/Europe and India for a long-term gasoline trade, not allaying the fear though that a long-haul trade will take time to establish credibility, with concerns around security of supply.
