Explained: Why India is trying to boost its oil refining capacity
India is set to double its refining capacity for crude oil to 450-500 million tonnes per annum by 2030. Why this boost? How will it be achieved? India is set to double its refining capacity for crude oil to 450-500 million tonnes per annum by 2030 said Union Minister for Petroleum and Natural Gas Dharmendra Pradhan on Tuesday. The minister said the construction of a new refinery in Ratnagiri, Maharashtra with a refining capacity of 60 million tonnes per annum is set to start soon. Why is this boost in capacity needed? India’s current refining capacity of 249.9 million tonnes per annum exceeds domestic consumption of petroleum products which was 213.7 million tonnes in the previous fiscal. However, India’s consumption of petroleum products is likely to rise to 335 million tonnes per annum by 2030 and to 472 million tonnes by 2040 according to government estimates. India needs to boost refining capacity to meet growing demand. Pradhan said the expansion in refining capacity will come from both brownfield and greenfield projects. The new refinery project in Ratnagiri is one of the key projects in the planned expansion and has received investment from Saudi Arabia and the UAE’s national oil companies — Saudi Aramco and ADNOC respectively — which together own 50 per cent of the project while the remaining 50 per cent is owned by Indian PSUs, Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. Other key projects include a joint venture between HPCL and the Rajasthan government for a new refinery in Barmer Rajasthan with a refining capacity of 9 million tonnes per annum as well as the major expansion projects in existing refineries in koyali, Paradip and Panipat. What are some of the roadblocks in achieving this? Experts said many of the projects by the state run oil refiners have been severely delayed in the past because of issues in acquiring the required land as well as in obtaining environmental clearances. IOCL’s Paradip refinery was initially expected to begin operations in 2012 but was only able to start operations in 2015 because it faced land acquisition and environmental clearance issues.
China’s new marine fuel contract to attract strong industry, investor interest
China’s marine fuel futures contract that debuts on Monday on the Shanghai International Energy Exchange (INE) is likely to attract strong interest, despite weakened ship fuel demand amid the coronavirus pandemic, industry participants said. The new low-sulphur fuel oil (LSFO) contract features marine fuel meeting stricter international emissions rules and is the latest commodity futures product – and second oil contract after Shanghai crude – open to foreign investment. With few competitors, the contract stands a fair chance to grow into an Asian benchmark for shipping fuel, said traders and brokers, especially as about 20 Chinese refineries are freshly equipped to produce the low-sulphur fuel. The contract could also further Beijing’s ambition to build a bunkering hub in eastern China’s Zhoushan port to challenge Singapore for the multi-billion dollar shipping fuel market. “The listing is hugely attractive for physical enterprises, institutional investors and retail investors,” said Xu Lei, a manager at Xiandai Resource Co, an eastern China trading company planning to trade the contract. Senior managers at state refiners and global trading firms told Reuters they are also keen to trade the contract and will monitor the market from Monday. The exchange will pick about a dozen financial investors as market makers to boost initial liquidity, said INE officials. “We hope to provide the market a better tool to hedge risks as the global shipping industry transforms from high to low-sulphur fuel and satisfy the need for an Asian marine fuel benchmark,” said one INE executive. The INE sources declined to be named because they are not authorized to speak to the media. China removed a consumption tax on fuel oil this year and issued its first-ever supply quotas for 10 million tonnes of the new 0.5% sulphur marine fuel, earlier relying on imports from Singapore for its bonded bunkering market of about 12 million tonnes a year. Compared to Shanghai crude, the LSFO contract has a more diversified investor base that includes traders and bunker operators, on top of the mostly state refiners and financial investors that dominate the crude contract. China also has a high-sulphur fuel oil contract for domestic trade, listed on the Shanghai Futures Exchange. It has recorded healthy volumes the past two years and will continue to trade, INE officials said, although its physical market has shrunk with the change of shipping fuel emissions rules. RETAIL INVESTORS, BUNKER SUPPLIERS With a lower threshold for opening an account at 100,000 yuan ($14,100) versus 500,000 yuan for crude oil, the LSFO contract could draw more retail investors. “With the tax waiver, domestic refinery production has become the main force that will give us pricing advantage and trading volumes,” said Yang Jiaming, an analyst at CITIC Futures, adding that the contract’s volumes could top Singapore’s over-the-counter LSFO swaps. China has 14 licensed bonded bunker suppliers, four of whom have said they will trade the LSFO contract. “We’ll be closely monitoring the contract and will jump in once arbitrage opportunities between Singapore and North Asia emerge,” said a Beijing-based executive with a global trader. The contract faces challenges such as limited warehouse space, an issue that squeezed deliveries against the INE crude contract in April. INE also has stricter product specifications – such as for viscosity and density – than those prevailing in Singapore trade, and this may hamper arbitrage deliveries, traders said. INE did not immediately respond to requests for comment about these market concerns.
India to resume spot LPG imports in Sep after backlog clears
India is expected to resume spot imports of LPG in September after clearing the current inventory backlog, as rising LPG production after state-owned refiners ramp up operating rates, and languishing demand from the commercial sector during the lockdown added on to domestic supply, market sources said in the week of June 15. The LPG market is very long in India. We don’t need additional imports now, we’re all covered,” a source at a state-owned refinery said. “We’re probably resuming [spot] imports in September, we’ll see how the situation evolves, see how the lockdown is affecting demand,” the source added. Indian state-owned refiners Indian Oil Corp., Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd had sought an additional 776,000 mt of spot LPG for delivery between April and June at end-March and early April after India went under a nationwide lockdown on March 25, as demand for the cooking fuel surged, and to meet an increase in demand from the country’s distribution of free LPG cylinders to 80 million households for April to June. However, India had cancelled multiple LPG cargoes for May and June arrival with suppliers in the Middle East after buying too much, and over-estimating the demand spike. During the lockdown, India’s LPG consumption in May posted an 8.7% increase month on month to a four-month high of 2.317 million mt. This also represented a 12.8% increase year on year. India had extended its lockdown for two-and-a-half months until early June, and recently entered into a new phase termed Unlock 1.0 on June 8. Most economic activities have resumed and public spaces reopened. “Domestic demand [right now] is normal,” the source said. “Previously refinery output was restricted. Now refineries have increased operations, so LPG production is higher. As of now, we have no spot requirement,” the refinery source said, adding that spot buying will resume when demand improves. Indian state owned refiners IOC and BPCL have increased refinery run rates after the lockdown measures eased as demand for gasoline, diesel and jet fuel picked up. IOC had raised crude throughput to 80% levels at its nine refineries, Platts reported previously. During the lockdown, the refiner had cut its overall run rates by 25%-30%. BPCL had scaled up the average run rate at its four refineries to 75% as of June 2, and plans to operate its 15.5 million mt/year Kochi refinery at 90% by the end of June, according to an earlier Platts report. “It seems Indian imports is not easy to return as many vessels are waiting offshore at Haldia for over 10 days,” a North Asian trader said. Commercial Demand Falls While residential LPG demand surged during the lockdown, commercial LPG demand dropped significantly, according to a report by S&P Global Platts Analytics. There could be some diversion of subsidized domestic LPG cylinders into commercial use, based on a December 2019 audit report by the Comptroller and Auditor General of India (CAG) cited by the Platts Analytics report. During the lockdown, the commercial enterprises using the subsidized domestic gas were not in operation, thereby affecting demand. The lockdown had also affected the livelihood of the Pradhan Mantri Ujjwala Yojana, or PMUY, beneficiaries, who are entitled to free LPG connections and cylinders. Lack of economic opportunities have forced many people to move back to their home towns and villages. A lack of funds also increases the likelihood of households switching back to freely available biomass and woodchips for cooking needs. Although lockdown restrictions have eased, a fear of a second wave of COVID-19 cases have kept people mostly at home. “Due to weaker economic outlook and changing consumer behavior, revival of the business activities of commercial enterprises is going to be slow. Subsequently, diversion of domestic LPG cylinders for commercial usage would be quite low in the coming months,” according to Platts Analytics. “Indian LPG demand is expected to post a slower demand growth of 1.5% to 3.5% for 2020, compared with a 6.5% demand growth last year, Manish Sejwal, NGL analyst at Platts Analytics said. CFR North Asia propane price slumped to a one-month low of $304.50/mt on June 12, as weak demand weighed on the market, but recovered to $329.50/mt on June 17. The price was last lower on May 13 at $293.50/mt.
GAIL, Adani, Petronet LNG join IGX; gas price of $4.07 per unit discovered
At a time when the price of domestic natural gas is as low as $2.39 per million metric British thermal unit (mmBtu), the Indian Gas Exchange (IGX) — the country’s first natural gas exchange — has got a market-discovered price of $4.07 per unit within the first two days of operation. Launched on Monday, the platform — set up by the Indian Energy Exchange — has so far traded 100 mmBtu gas. Giving major boost to IGX, big liquefied natural gas (LNG) players like state-run GAIL (India) and Petronet LNG have joined the exchange as members. Private sector majors like Adani Gas, too, have joined IGX as its member partner. “We have brought in 12 members and over 350 clients so far. GAIL and Petronet have joined as our members,” said Rajiv Srivastava, managing director and chief executive officer, IEX. Other members of the platform include Manikaran Power, GMR Energy Trading, Zak Venture, Kreate Energy, Gita Power and Infrastructure, Abja Power, Arunachal Pradesh Power Corporation, Andhra Pradesh Gas Power Corporation, and Instinct Infra and Power. Trade members facilitate trade on the exchange on behalf of their clients. They act as the link between the exchange and the clients registered on the exchange. A source indicated that 100 mmBtu of overall trade was for daily contracts only, even though there were bids for fortnightly and monthly contracts as well. The market-discovered price for first two days was Rs 309 per mmBtu or $4.07 per mmBtu. The exchange is LNG-driven, while the price of domestically produced natural gas is notified by the government. At present, the domestic natural gas price is at $2.39 per mmBtu, which most producers, including Oil and Natural Gas Corporation, have cited as unviable. Launching the IGX, Petroleum Minister Dharmendra Pradhan had endorsed a market-driven pricing mechanism and hinted at the introduction of a new tariff policy on gas. He said the IGX would help in finding market-driven pricing in India.
India’s gas policy change to widen LNG’s reach, draw new investors
India’s decision to ease rules on setting up LNG stations will help expand the fuel’s accessibility as well as attract more private investors as the country nurtures a dream to become a gas-based economy, the head of India’s oil and gas regulator told S&P Global Platts in an interview. This decision will help to tap in smaller scale and well as commercial transport sector for LNG use, a step towards boosting gas consumption in India where the share of gas in the energy mix is as low as 6%, compared with a global average of close to 25%, said Dinesh Kumar Sarraf, chairperson of India’s Petroleum and Natural Gas Regulatory Board. “The traditional ‘LNG premium over gas’ has narrowed down significantly. Therefore, India needs to develop this LNG fuel alternative. We have studied and found out that the City Gas Distribution companies are not necessarily the best bet to develop LNG stations. Therefore, we have opened up the LNG sector,” Sarraf said. Earlier this month, PNGRB issued a notice declaring that LNG stations would be excluded from the purview of CGD exclusivity licenses issued for specific geographical areas. Any entity can set up an LNG station in any geographical area or anywhere else, even if it is not the authorized entity for that area. According to Platts Analytics, the move would benefit integrated players and could also increase the penetration of LNG in the transport sector. Commenting on how the LNG-based transport sector — trucks and buses — would grow after the recent policy decision, Sarraf drew a comparison, saying currently there were 400,000 LNG trucks in China, an indication that the potential can be huge in India. “The rationale is that gas is cheaper than high-speed diesel. It’s more environment friendly too. But on the issue of how many LNG trucks and buses would come on road, how many LNG stations would come up and how much of LNG would be consumed through this route, it would depend how seriously various industries would take this development,” Sarraf said. “But we can already see that some companies have already initiated action on this. The government has always been supportive of gas as a product,” he added. Pipeline tariff structure Sarraf said that under the existing “cascading pipeline tariff structure” if gas travels through several pipelines, tariff for each pipeline have to be paid. Therefore, gas becomes unaffordable by the time it reaches a customer located at a distance from the gas source. “We want to address this issue of affordability by rationalization of tariffs. Soon we would initiate industry consultation to decide what’s the best way forward. The objective is to keep gas affordable in far flung areas,” he added. Earlier in the week, India launched its first natural gas trading platform, a move which government officials expect will bring more price transparency to the market and aid in boosting consumption of the clean fuel. The trading exchange for physical delivery of gas was launched by IGX, a wholly owned subsidiary of Indian Energy Exchange, or IEX. For the first phase of the launch there will be three pricing nodes, with ex-terminal prices at two of India’s busiest LNG terminals Dahej and Hazira in Gujarat on the west coast of India along with domestic gas price in Oduru, Andhra Pradesh on the east coast. “This will give confidence to consumers of natural gas who until now were not able to take a decision on whether to shift from other energy sources to natural gas as they were not sure whether they were getting a transparent price or not,” Sarraf said. India’s gas consumption is split between locally produced gas and imported LNG. However, a large portion of the gas which is allowed to be marketed freely is re-gasified LNG. India’s domestic gas output falls under the Administered Pricing Mechanism under which it’s sold at a price set by the Petroleum Planning and Analysis Cell on a half-yearly basis. Prices for LNG cargoes delivered to the west coast of India is currently benchmarked against the Platts West India Marker or WIM. Sarraf said that the extended countrywide lockdown that India recently witnessed had slowed down pipeline construction activity. “However, pipeline entities like GAIL and the GSPL consortium can catch up on the lost time. Good news is that many of the pipelines which were stuck-up for years have shown good progress in the recent quarters due to the excellent cooperation from the states and the efforts of the pipeline entities. Notable among them are the Kochi-Mangalore pipeline, the Ennore-Tuticorin pipeline and the Mehsana-Bhatinda pipeline,” Sarraf added. Commenting on the outlook for global LNG prices, he said that we would expect LNG prices to remain soft in the foreseeable future because of the additional capacity that’s coming up globally. “This would be good for a country like India which is looking to boost its gas consumption.”