Saudi Aramco continues to explore India investment plan
Worlds largest oil company Aramco remains committed on its investment plan in India, including a $15 billion deal with Reliance Industries, even though Covid-19 pandemic has made life difficult for oil companies with suppressed demand and falling oil prices and wide scale erosion in valuations. Replying to a query from IANS, Aramco said that it remains interested in all its Indian investment plan and will give appropriate updates soon. This would include proposed $15 billion investment in RIL’s refinery and chemicals business. Doubts were raised about investment plan of Saudi Aramco after the oil giant reported a 50 per cent fall in net income for the first half of its financial year, reflecting a devastating year for oil markets and the global economy at large as the world continues to battle the coronavirus pandemic. “Aramco continues to explore potential growth opportunities in Asia including India,” the company said in an e-mail reply. “We are still engaging in discussions with Reliance Industries and will make appropriate updates as and when necessary,” it added. Apart from the Reliance deal, Saudi Aramco has expressed its desire to participate in several other ventures in India, the world’s third biggest oil consumer. There have been government-to-government discussions for Aramco to pick up entire government’s stake in state-run refiner Bharat Petroleum Corporation Ltd. This would give the Saudi entity presence in vast Indian retail market with huge potential for growth. Indian government is also looking at Aramco’s investment in $60 billion oil refinery proposed in Maharashtra as well get its investment oil marketing and retailing in the country. The oil giant is also exploring options to put some of its oil in India’s strategic oil reserve. Despite the concerns for the oil market, analysts have said Aramco was better prepared to weather market volatility, owing to its size and scale, its low cost of production and solid free cash flow generation in a weak oil price environment. This is good news for its investment plan for Asia. India’s Ministry of Petroleum and Natural Gas recently notified liberalised guidelines for bulk and retail marketing of petrol and diesel, offering new opportunities for foreign oil companies, including those in the Gulf, to enter this lucrative energy business. India is one of the biggest markets in the world for petrol and diesel with retail and bulk domestic sales growing by approximately eight per cent a year. Leading global energy companies, including Saudi Aramco, Total of France and Trafigura, headquartered in Singapore, have been urging the Indian government to allow them to enter the retail segment of fuel marketing. “The simplified guidelines aim at increasing private sector participation, including foreign players, in the marketing of motor spirit (petrol) and high speed diesel. An entity desirous of seeking authorisation for either retail or bulk must have a minimum net worth of rupees 2.5 billion at the time of making the application and rupees 5 billion in case of authorisation for both retail and bulk,” the notification said. To get approval for retail marketing, a company must undertake to set up at least 100 sales outlets across India. “The policy has opened up the marketing sector of petroleum products by removing the strict conditions applicable earlier,” the Ministry claimed. “The new policy has the potential to revolutionise marketing of transport fuels in the country. It will also encourage dispensing of alternate fuels and augmentation of retail network in remote areas and ensure higher levels of customer service,” the notification said. Until now, oil firms seeking to enter fuel retailing business had to have specified investments in refining, pipelines, oil exploration and production or terminals in India. Only Indian state-run oil companies had such investments, restricting fuel marketing business to these companies.
Petronet CEO gets 27% salary raise in FY20; Search launched for new chief
India’s biggest gas importer Petronet LNG Ltd gave its outgoing chief executive Prabhat Singh a record 27 per cent rise in remuneration in FY20 and has now begun a search for a new CEO on modified terms that made just retired executives of PSUs ineligible. Singh, who completes his five-year term as managing director and CEO next month, took home a record Rs 18 million in fiscal 2019-20 (April 2019 to March 2020), according to Petronet’s latest annual report. This included Rs 2.25 million commission on profit. Petronet, which is registered as a private limited company but is headed by the oil secretary, had paid him a total of Rs 14 million in the previous fiscal. The salary paid to the CEO of Petronet is much higher than that is drawn by chairmen of its promoter PSUs, namely GAIL, IOC, ONGC and BPCL. Singh was appointed CEO of Petronet on September 14, 2015, and that year he took home Rs 4.04 million (the remuneration for six-and-a-half-months). In the following year, he took home Rs 10.8 million. Though Singh, 63, was eligible for an extension till he achieved superannuation age two years later, Petronet has begun a search for a new CEO. The company has invited applications from eligible candidates by September 9, according to a notice. “The candidate should be aged minimum of 48 years and maximum of 60 years on the date of vacancy i.e. September 14, 2020,” it said. Also, the “applicant must, on the date of application, as well as on the date of interview, be employed in a listed company with a turnover of Rs 50 billion or more,” it said. This is a new clause and essentially bars executives of gas utility GAIL (India) Ltd, refiners Indian Oil Corp (IOC) and Bharat Petroleum Corp Ltd (BPCL) and explorer Oil and Natural Gas Corp (ONGC) who have either just retired from service after attaining 60 years of age or are due to superannuate this month. The ’employment status’ was not an eligibility criterion when past CEOs including Singh were appointed, sources in the know said. The selection of the new CEO will be done through a search committee of the board of Petronet, where state-owned GAIL, IOC, ONGC and BPCL hold 12.5 per cent equity stake each. Chairmen of promoter PSUs are normally the nominee director on the Petronet board. The notice also stated that the candidate “should have held the position of a director on the board of the company (with a minimum turnover of Rs 50 billion) in the oil and gas/hydrocarbon sector (public limited company”. “The position carries an attractive perquisite which includes retiral benefits, performance incentive, company vehicle, medical facility, post-retirement medical scheme, group term-life insurance, group personnel accident insurance, etc, as per company’s policy,” it said. Petronet operates liquefied natural gas (LNG) import terminal at Dahej in Gujarat and Kochi in Kerala. The Mumbai listed firm had a turnover of Rs 350 billion in FY20. Alongside the CEO’s position, Petronet also advertised for Director (Business Development and Marketing), seeking candidate between the age of 48 and 57 years who are on “regular/permanent” employment with a PSU or private company “in the grade/position of maximum two-level below the board.” The employment status eligibility is also first for a director appointment.
Surge in spot Asian LNG prices looks good on paper, but deceives: Russell
The spot price of liquefied natural gas for delivery to north Asia has more than doubled since hitting an all-time low earlier this year, but the gain is more impressive on paper than in reality. The spot price ended last week at $4.10 per million British thermal units (mmBtu), its highest since mid-January and 122 per cent above the record low of $1.85 touched in separate weeks at the beginning and end of May. While traders playing the spot market could in theory have booked major profits from such a strong percentage increase, the reality for LNG producers selling into Asia is somewhat different. Spot LNG prices in Asia tend to be cyclical, with the high point for the year coming in the peak of northern winter demand, and generally a smaller peak occurring during the summer demand period. The economic fallout from the novel coronavirus pandemic, coupled with a surge in supply, has upended the usual cyclical behaviour of spot prices, with a clear downtrend from the pre-winter peak of $6.80 per mmBtu in October last year to the lows in May. The recovery in spot prices may not be driven mainly by improving demand, rather it may be linked to rising prices of natural gas in the United States and Europe due to a hotter than usual summer boosting air-conditioning demand for electricity. U.S. natural gas futures have gained 65.2 per cent between the closing low for the year so far of $1.482 per mmBtu on June 25 to the $2.448 finish on Aug. 21. Similarly, UK natural gas futures have leapt 168 per cent from their year-to-date low of $1.027 per mmBtu to the close of $2.755 on Aug. 21. The increase in these two benchmarks is likely a catalyst for spot Asian LNG’s recent gains, as well as some signs that supply had been tightening, with a maintenance shutdown scheduled for Chevron’s Gorgon project in Western Australia and cancellations of U.S. cargoes. However, the supply issues may not have much impact, with Gorgon now undergoing a phased shutdown, and more U.S. cargoes expected in coming months. Buyers of U.S. LNG are expected to cancel 10 cargoes for October, the lowest number for at least four months, according to trade sources citied by Reuters. There is some evidence of improving LNG demand in north Asia, a region that includes Japan, China and South Korea, the world’s three biggest buyers of the super-chilled fuel. LNG imports by countries in north Asia are on track to be around 16.6 million tonnes, according to Refinitiv data, which would be the strongest month since February. SPOT PRICE STILL WEAK However, it’s worth noting that the current spot price for Asian LNG is barely enough to incentivise more cargoes to be offered in the market. Most U.S. projects require a price of $5-$6 per mmBtu to make shipping to Asia profitable, while Australia’s east coast ventures based on coal-seam gas are believed to need a spot price of at least $3.50 to make money, although the west coast projects need a far lower number of closer to $2. This means that even the recent sharp rise in the spot price isn’t enough to make U.S. exports to Asia viable on a spot basis, while Australian producers are only just in the money. A further concern for producers selling into Asia on longer- term, oil-linked contracts is that the lag typically built into these deals means that they are likely receiving less money for cargoes being delivered this month and next. The price of benchmark Brent crude futures dropped to a 22-year low of $15.98 a barrel on April 22, at the peak of the brief price war between top exporters Saudi Arabia and Russia. While the price war ended with an agreement by the group known as OPEC+ to deepen and extend crude production cuts, the crude-linked LNG that would have been arranged when the oil price was weak is likely being delivered in the third quarter. While the recovery in Brent to trade in a range around $44 a barrel will once again boost oil-linked LNG prices, this will likely only be a factor in the fourth quarter. This means that for the current quarter many LNG producers will be having to deal with weak oil-linked contract prices, as well as spot prices that are still soft in historical terms.
More oil and gas bankruptcies coming
Bankruptcies in the U.S. oil patch are on the rise after the global pandemic decimated demand. But shale companies were struggling before COVID hit, loading up on debt before prices came crashing down. Law firm Haynes and Boone counted nearly 500 bankruptcies among oil and gas companies since 2015, with 60 so far this year, and 18 filings in July alone. Buddy Clark, co-chairman for the firm’s energy practice, expects those bankruptcies to accelerate. His Dallas-based firm represents oil and gas clients in bankruptcy court, primarily creditors such as commercial banks and private equity firms. Clark explains that oil prices were soaring above $140 a barrel when hydraulic fracturing techniques were perfected, giving rise to a new, highly-leveraged industry overnight. Oil is now hovering around $42 a barrel. Answers have been edited for clarity and length. Q: How did we get into this situation with oil and gas companies increasingly going bankrupt? A: This new industry required, instead of 10 acres or 40 acre-tracts to drill oil, it required 1,000 acres, 2,000 acres, to properly exploit the shale. That required an incredible amount of capital. To play the game you had to acquire the leases and spend a lot of money drilling wells before you even saw a dime coming out of the ground. Nobody thought it was sustainable, but the anticipation was you develop the reservoir and you can then start producing, or you can take that property that you explored and developed and flip it to a bigger company. There certainly was a food chain that was established. But all those dominoes fell when the commodity price no longer kept propping up that business plan. And so when the dominoes fell, they fell hard, and they fell across the board. Q: The oil industry has been through a lot of ups and downs. What makes this downturn different? A: You can go back to the early 1900′s, when every time a new boom town was founded, the supply just overwhelmed the market so prices collapsed. What’s different now is the demand destruction. It’s going to take a long time to recover, and the question is does it ever recover, or do we see alternative sources of fuel taking up the slack? Q: Are you expecting bankruptcies to continue to accelerate in the oil and gas sector? We’re going to continue to see more pain in the industry. If you would tell me we could find a cure for COVID tomorrow, I could give you a much better, clearer idea of what’s going to happen. There is no clear future, so it makes it harder for people to invest in new properties, new companies, new employees. Prices will probably come up a little bit, but probably not high enough or fast enough for a number of companies that are still going to be filing for bankruptcy. Q: What types of companies are struggling the most? The new market entrants – they were late to the game but took on debt and then prices collapsed before they could establish any value. You’re also seeing the companies that bought on the fringes of the best plays. The other group you could look at are those with debt maturities coming up and there’s billions of dollars coming due in the next two to three years. But it’s not just these new market entrants that are hurting. There are some very substantial companies that have also filed. Q: Are you encouraging loans to or investments in shale companies? The lenders are only going to get a fixed return in investment, which is very low so there’s no value in them taking any risks at all. Private equity’s model right now is buy distressed assets, hold on through this downturn and then be in a position to flip or go public with the assets. Investments are being made, but it is not the go-go days that you saw between 2010 and 2014, where the banks could not throw enough money at these companies. Q:. You represent banks. Are they writing off oil and gas loans at this point? Most of the larger commercial banks have written down a substantial amount of their portfolio, which is very unheard of. Banks are taking hits this time around in 2020 that they didn’t take in 2015-2016. There was a smaller oil and gas lender that had a portfolio of loans outstanding, and they sold them for half that price. That’s a pretty stark indication of where the banks are valuing their loans. But the larger institutional commercial banks, you don’t see them selling off their loans. They’re going to hold onto it. If you sell at the bottom, you’ve locked in that loss.
Saudi Arabia’s Public Investment Fund looks to invest up to $1 billion in Jio’s fibre assets
Saudi Arabia’s Public Investment Fund (PIF) has initiated discussions with Reliance Industries (RIL) on investing as much as $1 billion in Jio’s fibre assets, said several people aware of the matter, adding to a stake purchase in Jio Platforms. The sovereign wealth fund (SWF) is in the process of rejigging its $300 billion portfolio – booking profits from its large Silicon Valley, Big Oil and aviation bets and withdrawing from English Premier League club investments. PIF began talks after rival Abu Dhabi Investment Authority (ADIA) re-engaged with Jio on a plan to invest about $1 billion in its pan-India fibre assets, said the people cited above. RIL declined to comment. PIF didn’t respond to queries. Both ADIA and PIF have contributed a total $2.2 billion to Jio Platform’s $20.8 billion fundraise that saw 13 investors, led by Facebook, coming on board in less than three months. A fibre deal could further strengthen ties between the Kingdom and India’s biggest company. “Saudi Aramco is already negotiating to invest in Reliance’s refining and petrochemical business,” said a long-time Ambani family associate. “From a pure vendor arrangement between an oil producer and a refiner, both Crown Prince Mohammed bin Salman and (RIL chairman) Mukesh Ambani want to cement their association as strategic partners.” Anchor investors To be sure, the ongoing talks may not translate into a deal, said the people cited above. After divesting its towers to Canada’s Brookfield in 2019 for Rs 25,215 crore (about $4 billion), RIL’s efforts to unlock value in its fibre assets were part of a series of time-bound asset-monetisation initiatives to pare debt. RIL had transferred its tower and fibre assets to two special purpose vehicles (SPVs) owned by two Sebi-registered InvITs or infrastructure investment trusts. But late last year, these talks were put in cold storage over differences in commercial and operating terms between RIL and an ADIA-led consortium of GIC of Singapore and I Squared Capital, an infrastructure-focused fund. At stake was a controlling stake in the fibre InVIT, Jio Digital Fibre. Mukesh Ambani’s family office had also offered to co-invest at the time. The tower trade is yet to receive regulatory approvals. ET was the first to report July 8 that negotiations with ADIA had been revived. “The re-engagement has given that extra nudge to PIF,” said one of the persons cited above. “The prolonged trend of work from home, schooling, entertainment from home has catalysed a shift in consumer preference, which in turn makes the investment thesis stronger in a country that is already among the most under-penetrated in Asia broadband connectivity.” Fixed broadband penetration is less than 20% while that of wirelines is 7% in India. Jio has built up the largest fibre network in the country and aims to take advantage of a broadband market that’s expected to grow two-five times in terms of subscribers. ADIA and PIF are expected to be anchor investors in the InvIT with the former possibly leading the consortium. The broad contours of this transaction are similar to that of the Brookfield-Jio tower deal – a 30-year sale and buyback with an assured return to investors. Jio is believed to have offered 10-13% internal rates of return on equity to investors, said people aware of the matter. The equity value of the fibre backbone is pegged at around $8 billion, excluding liabilities. Revenue upside from sales generated by third parties using the network are being finalised. In the past, up to 50% of the fibre capacity, as per the terms offered by RIL, was to be used by Jio for its own subscribers while the rest was meant for third-party users. Interestingly, PIF was to be a part of the investor consortium in the tower InvIT along with Canadian pension fund BCIMC and Singapore’s GIC. Bundled offerings Jio’s entire business model thrives on superior connectivity on the back of digital infrastructure, high-quality but affordable service and agile adoption in the other digital ecosystems through bundled offerings that can be subsequently monetised. “With the commercial launch of Jio Fibre, Jio has been targeting the post-paid segment of incumbents’ mobile users through its mobile number portability (MNP) services & bundled offers for home users. While post-paid has traditionally displayed a high level of stickiness, it was feared that these actions could potentially lead to higher churn in this segment for Bharti,” argued Arthur Pineda, an analyst with Citi. Instead of being a “passive dumb pipe”, it’s Fiber to the home (FTTH) services has already connected 1 million users and aims to connect another 500 million customers and over 50 million homes and 15 million enterprises with high-speed fibre across 1600 cities in the next five years. Jio has laid 700,000 route kilometers, which is being increased to approximately 1,100,000 route kms, of built and under-development fibre. As of March 31, 2020, RIL has investments of Rs 78,107 crore in the equity and Optionally Convertible Preference Shares (‘OCPS’) of Jio Digital Fiber Private Limited (‘JDFPL’) and Reliance Jio Infratel Private Limited. Analysts calculate, RIL holds Rs 40,100 crore nonconvertible debentures (NCDs) in the tower and fibre SPVs and will receive cash in lieu of these securities, as and when the InvIT transactions close. In April 2019, RIL said the two trusts have acquired 51% stakes each in Jio’s fibre and tower units — Jio Digital Fibre Pvt Ltd (JDFPL) and Reliance Jio Infratel Pvt Ltd (RJIPL). The trusts are sponsored by RIL’s 100% subsidiary, Reliance Industrial Investments and Holdings Ltd (RIIHL). These were a precursor to onboard strategic investors in them and deleverage its consolidated balance sheet. The latest estimate suggests Reliance Jio’s net debt to be at Rs 22,200 crore ($3 billion) and another Rs 37,000 crore ($5 billion) of spectrum liabilities.
GAIL sees gas sales returning to pre-COVID-19 levels by quarter end
State-owned gas utility GAIL India Ltd sees its gas demand returning to pre-COVID-19 levels by the end of the current quarter as the expansion of the city gas network will offset shrinking consumption, its Director (Marketing) E S Ranganathan said on Thursday. GAIL, the country’s largest natural gas marketing and transporting company, sold about 113 million standard cubic metres per day of the fuel before the outbreak of the pandemic. “We (GAIL) have come back to more or less 95 per cent level,” he said at FIPI’s Young Professionals Forum. “It is going to come back to 100 per cent level by the end of this quarter.” GAIL saw gas demand almost halving when a nationwide lockdown was imposed beginning March 25 to contain the spread of coronavirus. Industries that used gas as feedstock shutdown and CNG-run buses and vehicles went off the road. But with the restarting of economic activity and unlock phases that began in May and June, the demand started coming back, he said adding GAIL is currently selling gas at almost 95 per cent of pre-COVID-19 levels. The most prolonged reduction in gas demand came from the city gas distribution sector that sells CNG to automobiles, piped cooking gas to households, and provide fuel to hotels and other industries in towns. Ranganathan said the reduction in demand in existing city gas networks would be offset by new demand from newer areas where the network is being expanded now. City gas networks are mostly concentrated in Delhi, Gujarat, Mumbai and a few other cities and licences have been given to roll out the same in other areas. “As many as 475 CNG stations and 1 lakh households were added last fiscal and the same trend is likely in current fiscal,” he said. “The demand destruction will be offset by an increase in geographical reach.” He said gas consumption for the industry as a whole is likely to return to normal by the end of the financial year. “GAIL will see its gas sales returning to pre-COVID levels by end of the quarter and for the industry as a whole it will be by the end of the financial year,” he said. Speaking at the same forum, Hindustan Petroleum Corp Ltd (HPCL) Director (Refineries) Vinod S Shenoy said “huge demand destruction” of liquid fuels such as petrol, diesel, and ATF happened after lockdown. Demand fell by as much as 70 per cent but after unlock and lifting of restrictions, it has come back to 72-80 per cent. “We expect demand going up to 90 per cent in the fourth quarter (of current fiscal),” he said. Sales of petroleum products in May 2020 were 77 per cent compared to May 2019 and sales in June 2020 were about 91 per cent as compared to June 2019. However, with some states re-imposing lockdowns, the demand for all petroleum products has fallen to 80-82 per cent. For reaching pre-COVID-19 level public transport and offices will have to resume. Also, the aviation sector has to return to normal.
Petronet LNG Volumes Continue To Surprise; Utilisation Rate Back To Pre-Covid-19 Levels
In Q1 FY21, Petronet LNG Ltd.’s better-than-estimated volumes at 190 trillion British thermal units (up 5% versus estimate), led to marginal Ebitda beat at Rs 9 billion. The company has given an update on its current operations, highlighting that post lifting of the lockdown, regasified liquefied natural gas demand has recovered gradually. Since the first week of June 2020: a) Dahej terminal is operating at 100% capacity of 17.5 million metric tonne per annum (63 million metric standard cubic meter per day versus January-February 2020 average of 92% capacity of approximately 58 mmscmd) b) Kochi terminal is operating at 20% capacity of approximately 3.57 mmscmd. Various power plants are switching off coal due to the current lower spot gas price environment, resulting in higher gas offtake and imports. Negotiations with Qatar Gas over liquefied natural gas pricing are ongoing. Petronet LNG has indicated that a final decision on the memorandum of understanding with Tellurian Inc. could be reached in FY21.
Italian energy utility Snam plans to enter India gas market
Italian energy utility Snam plans to set its foot in India’s gas infrastructure space as the country intends to raise the share of gas in its energy basket The company’s CEO recently had a discussion with petroleum Dharmendra Pradhan regarding collaborations in the areas of liquefied natural gas (LNG), gas storage and hydrogen fuel. Responding to FE’s queries, Snam said “the significant push towards cleaner energy shift and in particular towards gas is what makes India an interesting market,” adding that “we look forward to opening soon our office in India to enhance the dialogue and cooperation with Indian partners that we have developed over the past couple of years Snam wants to tap the relatively nascent market of gas for transportation and utilise its technology and equipment for CNG or liquefied-CNG refuelling stations. Over 31% of SNAM’s shares are held by holding company CDP Reti, which is a joint venture between Italy’s state-run Cassa Depositi e Prestiti (CDP) and the State Grid Corporation of China. FE’s email to the ministry of petroleum and natural gas asking whether the government’s current anti-China stance will be a problem for Snam’s potential investments in the country remain unanswered. The management of Snam is Italian and is proposed by CDP and the Italian government. “There is no influence by other shareholders on any of Snam investment decisions or strategy and therefore we don’t see any issue,” Snam told FE. India aims to increase the share of natural gas in its energy mix to 15% by 2030 from the current level of about 6%. Demand for natural gas in the domestic market is largely dependent on the fertiliser (28%), power (23%), city gas distribution entities (16%), refinery (12%) and petchems (8%).
Investments in LNG not looking lucrative at this point of time: Petronet LNG
According to Prabhat Singh, Managing Director and CEO of Petronet LNG Limited, the investments in the Liquefied Natural Gas (LNG) market are not looking very lucrative. He was responding to a query on the status of the deal between Petronet LNG Limited (PLL) and US-based LNG developer Tellurian Inc. “We are exploring the market. But one thing is sure that investments as such are not looking lucrative at this point of time. To that extent, if you are getting a molecule floating on the water which is very cheap, which we are getting at this point of time, so those are the options which are on top priority today and we are working around that,” Singh told journalists. Earlier this year, a deal was renewed between PLL and Tellurian to finalise an investment in Tellurian’s Driftwood export project in Louisiana, USA. This deal is said to be relooked in light of the fall in global natural gas and crude oil prices. PLL and Tellurian had signed a non-binding memorandum of understanding under which PLL would buy 5 million tonne per annum LNG from Tellurian’s Driftwood project. PLL was also expected to invest $2.5 billion for an 18 per cent equity stake in the $28-billion Driftwood LNG terminal. Commenting on the price outlook for LNG, Singh said, “The time has come now that producers have to come to the consumer’s level of thought. The priority of producers is to place the molecule in the market. Price comes secondary and therefore most of the guys are looking for a daily pricing benchmark which is a dream come true for consumers.” According to Singh, LNG prices in the spot market are hovering close to $3 per million British thermal units (mBtu). Under longer term contracts, the prices are around $4.5-5.5 per mBtu. “In my opinion, the prices are expected to remain in this range… The days of $10 per mBtu gas price are over now,” he said. Singh estimates that spot LNG price would easily remain below $6 per mBtu for the rest of the current financial year.
What does the govt’s move to increase bioethanol in petrol mean?
We examine key challenges to raising the ethanol blending level for petrol from around 5 per cent currently to the targets set by the central government. The government has set targets of 10 per cent bioethanol blending of petrol by 2022 and to raise it to 20 per cent by 2030 under the ethanol blending programme to curb carbon emissions and reduce India’s dependence on imported crude oil. 1G and 2G bioethanol plants are set to play a key role in making bio-ethanol available for blending but face challenges in attracting investments from the private sector. We examine key challenges to raising the ethanol blending level for petrol from around 5 per cent currently to the targets set by the central government. What are 1G and 2G biofuel plants? 1G bioethanol plants utilise sugarcane juice and molasses, by products in the production of sugar, as raw material, while 2G plants utilise surplus biomass and agricultural waste to produce bioethanol. Currently, domestic production of bioethanol is not sufficient to meet the demand for bio-ethanol for blending with petrol at Indian Oil Marketing Companies (OMCs). Sugar mills, which are the key domestic suppliers of bio-ethanol to OMCs, were only able to supply 1.9 billion litres of bio-ethanol to OMCs equating to 57.6 per cent of the total demand of 3.3 billion litres. Why are Indian plants not able to meet the demand for bio-ethanol? Experts point out that many sugar mills which are best placed to produce bioethanol do not have the financial stability to invest in biofuel plants and there and there are also concerns among investors on the uncertainty o the price of bio-ethanol in the future. “In general, the sugar sector has its own balance sheet issues,” said Shishir Joshipura, CEO and MD of domestic biofuel technology provider Praj Industries, noting that sugar mills have had to pay high prices for sugarcane set by the government even when there have been supply gluts. The prices of both sugarcane and bio-ethanol are set by the central government. An expert at a leading OMC, said the price of obtaining agricultural waste required for the production of bio-ethanol at 2G plants was currently too high for it to be viable for private investors in the country. The expert noted that state governments needed to set up depots where farmers could drop their agricultural waste and that the central government should fix a price for agricultural waste to make investments in 2G bioethanol production an attractive proposition. The three state-run OMCs Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. are currently in the process of setting up 2G bio-ethanol plants