Commodities 2021: India oil sector to focus on comeback, consolidation and carbon

India’s appetite for oil is set to emerge from the red and post positive growth in 2021, a year that will likely witness key consolidation and mergers as well as refiners’ strategic push to devise ways to reduce their carbon footprint.

Most analysts believe the worst for India’s oil demand is over. The country is set to witness the first year of negative oil demand growth in nearly two decades in 2020 on the back of the COVID-19 pandemic, but the government’s efforts to inject funds into infrastructure will support growth.

In addition, the plan for a majority stake sale in state-run Bharat Petroleum Corp., Saudi Aramco’s planned purchase of a stake in Reliance Industries and the expected completion of refinery expansions — delayed from 2020 — will be some of the key themes that will dominate the headlines in 2021.

“The year 2021 brings optimism for the energy sector not only in terms of a quick jump to pre-COVID levels, underpinned by structurally buoyant energy fundamentals, but also robust incremental growth enabled by the government’s thrust upon cross-sectoral reforms and conducive investment climate,” B. Anand, CEO of Nayara Energy, told S&P Global Platts.

S&P Global Platts Analytics expects India’s oil demand in 2021 to recover to levels slightly above 2019 as the economy rebounds, with consumption expected to grow by 465,000 b/d, after declining 455,000 b/d in 2020. India’s mobility index continued to improve over the past few months, with November averaging 124% against pre-COVID levels, up from 104% in October. Vehicle sales are also witnessing growth.

“India’s oil demand is expected to rebound next year as the nation continues to ease restriction measures to help lessen the pressure on the reeling economy,” Lim Jit Yang, advisor for oil markets at Platts Analytics, said.

STIMULUS PACKAGE TO AID GROWTH

In November, New Delhi announced a $35 billion package to stimulate the economy by boosting jobs, consumer demand, manufacturing, agriculture and exports.

“The Indian government’s focus on infrastructure to boost economic growth is likely to buoy Indian oil demand next year, in particular for diesel. Already, demand has bounced back strongly and refiners are rushing to buy crude,” Amrita Sen, chief oil analyst at Energy Aspects, said.

India’s demand for oil products rose 0.4% month on month in November to 17.83 million mt, or 4.7 million b/d, latest provisional data from the Petroleum Planning and Analysis Cell showed. Diesel demand rose 5.2% on the month, gasoline inched 0.4% higher, naphtha demand increased 3.3%, and jet fuel rose 4.8% in November.

“We continue to see sustained strength in demand for products on the lighter end of the barrel, while middle distillates will struggle for a few more quarters,” Senthil Kumaran, head of oil for South Asia at FACTS Global Energy, said.

India’s refinery runs hovered in the 4.3 million b/d range over June-October. The sharp increase in October demand and the conclusion of fall maintenance season helped to boost November runs by an estimated 400,000 b/d month on month, FGE said.

“However, overall refinery runs will remain lower than pre-COVID-19 levels in the first half of next year, and might see a gradual recovery to pre-pandemic levels by Q4 2021,” Kumaran added.

CONSOLIDATION TO GAIN SPEED

Amid a recovering oil market, consolidation is expected to gather pace. Saudi Aramco is expected to continue pursuing its ambition to take a stake in Reliance Industries. However, the COVID-19 outbreak and the subsequent oil crash meant that a final decision on the joint venture could take much longer than anticipated and may not be free of hurdles and tough re-negotiations, although analysts believe that the planned tie-up is unlikely to fall apart.

A joint venture with Reliance will guarantee a stable channel for crude at a time Aramco is sticking to its plan to increase its maximum sustained production capacity to 13 million b/d, from 12 million b/d.

India has also decided to divest the government’s 52.98% stake in BPCL. An evaluation committee is looking into expressions of interest from Vedanta, Apollo Global and Think Gas. A majority stake in BPCL will give the buyer access to around 14% of India’s oil refining capacity of 5.2 million b/d and about 25% of the fuel market share in India.

In addition, India will remain a hotspot for overseas investors looking for a pocket of opportunity in the oil sector as it advances its ambition to pursue refining expansion.

Prime Minister Narendra Modi has said that plans are in place to grow India’s refining capacity from about 250 million mt/year currently to 400 million mt/year by 2025. But some analysts doubt India will be able to expand its refining capacity at the pace Modi highlighted, although they were unanimous in the view the country’s refining expansion was far from over, which could provide an opportunity for global oil firms to not only sell incremental crude volumes, but to also consider taking stakes in projects.

Credit: Platts

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