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Big shake-up

The entry of global giants into India’s growing oil market provides significant investment opportunity but diminishes public sector control over retailing

Big shake-up

India's fuel refining and marketing business, largely controlled by public sector enterprises, faces a big shake-up following the government policy to induce foreign oil companies to invest big in refining and retail. Among those global giants keen to set up facilities in India are Saudi Aramco, the world's second-largest oil and gas company after China's Sinopec, Total SA of France, BP Plc of UK, Exxon Mobil of the US and Singapore-based Trafigura's downstream arm Puma Energy. Total SA in partnership with Adani Group has applied for a licence to retail petrol and diesel through 1,500 outlets. BP has formed a partnership with Reliance Industries to set up petrol pumps.

The reasons behind the growing interest of global oil players in India are many. The increasing size of the Indian market and shrinking global market growth are among the key reasons. India, the world's third-largest crude oil importer, after China and the US, is currently the fastest-growing oil market. This comes at a time when the powerful Organisation of Oil Exporting Countries (OPEC) has provided a somewhat gloomy picture of the industry, across the world. India continues to be an exception and will remain so in the coming years. Interestingly, Russia, a global oil major, is cosying up with India as well for it is looking forward to playing a bigger role in the country's energy sector, opening up a 'Far East Energy Corridor' to push Russian exports of oil, gas and coal.

The 14-member global oil producers' group, OPEC's latest 'Global Oil Outlook' has become a matter of concern for all oil producers, exporters, refiners and retail traders. Stating that the last 12 months had been "challenging" for energy markets, OPEC has lowered its growth outlook for global oil demand. "At the global level, growth is forecast to slow from a level of 1.4 million b/d (barrels per day) in 2018 to around 0.5 million b/d towards the end of the next decade," OPEC said in the report. Furthermore, it notes that OPEC's own market share is dwindling. It has downwardly revised the forecast for global oil demand growth over both the medium-term and long-term, citing tough market conditions and "signs of stress" in the world economy.

"Signs of stress have appeared in the global economy, and the outlook for global growth, at least in the short and medium-term, has been revised down repeatedly over the past year," OPEC said. OPEC has lowered its outlook numbers for global oil demand growth to 104.8 million b/d by 2024. Its own production of crude oil and other liquids is expected to decline over the next five years, falling to 32.8 million b/d in 2024. That's down from 35 million b/d in 2019. OPEC's supply has been gradually falling in recent years, partly because of a pact with Russia and other non-OPEC members in support of the market. The group is expected to restrain oil production in 2020.

In contrast, BP's Energy Outlook 2019 says India's share of total global primary energy demand is set to roughly double to 11 per cent by 2040, underpinned by strong population growth and economic development. India accounts for more than a quarter of net global primary energy demand growth between 2017-2040. Further, it points out that India's gas production may grow but it will fail to keep pace with demand, implying a significant growth in gas imports. Incidentally, India's oil import dependence has jumped to as high as 84 per cent. The country's oil imports bill, last year, was USD $114.5 billion. Iraq, which toppled Saudi Arabia as the biggest crude oil supplier to India in 2017, continues its dominant position while Saudi Arabia, Nigeria and UAE remain as other top suppliers.

Notably, crude oil imports from the US jumped by over 72 per cent in the first five months of the current fiscal, partly under US pressure and also because India looks to diversify oil purchases beyond its traditional suppliers in West Asia. The US supplied about 4.5 million tonnes of crude oil during April-August 2019, as compared to 2.6 million tonnes of oil sourced from that country in the corresponding period, last year. Iraq continues to be India's top crude oil supplier, meeting close to one-fourth of the country's oil needs. Iraq sold 21.24 million tonnes of crude oil to India during April-August, almost 12 per cent more than 18.99 million tonnes it supplied in the same period in 2018.

Given the size of the Indian market and its future potential, global oil majors are naturally keen to directly enter the country with downstream projects such as refining and retailing. The government allows 100 per cent FDI in upstream and refining projects. India expects a massive foreign investment of USD $118 billion in the oil and gas sector in the next five years. The opening up of the refining and retail network will further boost the investment.

The government policy is clear and all-inclusive. Its latest gazette notification on the norms for setting up petrol pumps said the licensees would also be required to "install facilities for marketing at least one new generation alternative fuels like compressed natural gas (CNG), biofuels, liquefied natural gas, electric vehicle charging points etc at their proposed retail outlets within three years of operationalisation of the said outlet." Non-oil companies are also welcome in retailing.

However, the impact of the policy liberalisation on India's traditional public sector enterprises, having a lion's share of the refining and retailing business, is unclear. Open market competition in refining and retailing won't be easy for Indian firms, including private sector Reliance Industries. India's oil refining capacity is 250 million tonnes per annum (mtpa). RIL's refining capacity is 68.2 mtpa. A competition in downstream refining and retailing is most welcome if it ultimately benefits Indian consumers.

Views expressed are strictly personal

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