International Finance
July-August 2019 Magazine Oil & Gas

Arab investors hover over Indian oil sector

Arab investorshover overIndian oil sector
The Kingdom of Saudi Arabia and the UAE’s developing interest in India’s refining sector shows the latter’s appeal to the Gulf region

India’s state-owned oil companies’ capital expenditure has hit a four-year low with public sector undertakings such as ONGC and IOC seeing a decline in capital investments. They are planning to invest Rs. 9.36 billion in exploration, refining and petrochemicals during the fiscal year 2019 to 2020. However, in March, these public sector undertakings proposed an investment of Rs. 8.9 billion.

Reports suggest that they will invest nearly Rs. 9.4 billion. Even the estimated increase in the proposed investment is lower compared to the years prior to 2018. The period between 2017 to 2018 saw investment of Rs. 13.2 billion; in 2016 to 2017 it stood at Rs. 10.4 billion, and in 2015 to 2016 it was Rs. 9.7 billion.

The decline in investment has come at a time when India is seeking an increase in domestic output to reduce oil imports. The country’s import dependency of crude oil reached 84.7 percent last year and the pace of growth of local oil production has stalled. In fact, India’s oil and gas import expenditure was estimated to $109 billion last year — and expenditure during the current fiscal year is expected to increase to approximately $130 billion. 

Factors such as rising international crude prices and sharp weakening in currency have dampened the sector’s growth in the recent past. The government has acknowledged the country’s oil import dependency with measures to ramp up production and reform the Hydrocarbon Exploration Licensing Policy.

But the sector also needs an increase in hydrocarbon production to stabilise the growing demand. The Modi government has outlined a roadmap to reduce the country’s oil imports by 10 percent by 2020.  Finance Minister Piyush Goyal during his budget speech in Lok Sabha, the lower house of the parliament, said that a high-level inter-ministerial committee has made recommendations regarding the matter. 

Jonathan Markham, upstream oil and gas analyst at GlobalData told International Finance, “India’s oil production is forecast to have a minor amount of growth as a new deepwater project being developed by ONGC in the Krishna-Godavari basin will compensate for declining production from mature onshore and shallow water fields.”

The sector’s growing demand also points to the fact that India is the largest energy consumer after China in the region. A report published by BP Energy Outlook found that the country’s share of total global primary energy demand is expected to double to 11 percent by 2040. 

On the bright side, the country’s heavy reliance on oil imports has opened up a myriad of opportunities for oil-rich countries in the Gulf. These countries are investing a significant amount of money in India’s booming oil and gas sector as they seek major control of South Asia’s petroleum market. 

For example, the Kingdom of Saudi Arabia has expressed interest in India’s refining sector. The Kingdom’s oil minister during his visit to the country last year met Indian businessman Mukesh Ambani of Reliance Industries. After that, the minister tweeted that the world’s largest oil exporter Saudi Aramco and Reliance Industries are discussing joint investments in petrochemicals, refinery, and communications projects. Saudi Aramco CEO Amin Al Nasser also emphasised that the company is seeking interest in Reliance Industries after a string of discussions took place over opportunities in the country’s refining sector. 

Saudi Aramco along with its partner Abu Dhabi National Oil Company has acquired a 50 percent stake in $44-billion mega refinery-cum-petrochemical project situated in Maharashtra. Aramco’s CEO Amin Al Nasser said in a statement that he is quite positive of the company’s investment in India. 

The new site for the project will be at Raigad district, which is 100 km south of Mumbai. Initially, the refinery was proposed to be built at Nanar, a village in Ratnagiri district. However, the reason for the shift in location is because thousands of farmers opposed the City and Industrial Development Corporation’s plans to acquire land from 40 villages for the refinery construction.

The refinery with an anticipated capacity of 1.2 million barrels per day is expected to improve India’s fuel supply. 

Currently, Reliance operates two refineries at Jamnagar with a total capacity of 68.2 million tonnes each year.  According to several media reports, Reliance is planning to expand its only-for-exports special economic zone refining capacity to more than 41 million tonnes from 35.2 million tonnes. 

Aramco to remain invested

Aramco will continue to remain invested in the project under the terms of the agreement signed last year. India has been perceived as an investment priority for Aramco because the company has identified sufficient growth potential in the country—with approximately 8,00,000 barrels exported by Aramco to India. 

India is a captive market for crude oil, especially with companies like Reliance focused on expanding petrochemicals which requires crude for manufacturing. So, the Kingdom’s heightened focus on India’s refining sector is in line with its strategy to build a global empire for the crude it produces. This way it will also get a foothold in the country. 

Aramco is also interested in retailing fuel in India. A refinery in the country could be treated as a base to export oil to European and American countries lacking fuel reserves. 

The kingdom’s petrochemicals major Saudi Arabian Basic Industries Corporation is also scouting for opportunities in the country. 

India’s refining capacity of 247.6 million tonnes exceeds the demand of 206.2 million tonnes. The International Energy Agency said that this demand is expected to reach 458 million tonnes by 2040. 

Like most major producers, even the UAE is seeking investment opportunities to lock in customers in India — the world’s fastest growing fuel market. In March, it said that it is exploring refining and petroleum projects in addition to storing crude in the country. For this reason, it has rented space at the underground strategic oil storages built at Mangalore and Padur in Karnataka and Visakhapatnam in Andhra Pradesh.

Last year, India signed an initial agreement to lease out a part of underground strategic oil storage at Padur to ADNOC, and another pact to fill half of the 1.5 million tonne storage in Mangalore. 

Strategic Petroleum Reserve entity of India has constructed 5.33 million tonnes of emergency storages to meet its oil requirements over 9.5 days in those locations. The country is open to foreign oil companies storing crude on the basis that the stockpile can be used by New Delhi in emergency situations. 

The UAE is trying to ramp up investments even though it supplies very little crude to the country. Sultan Ahmed Al Jaber, Minister of State in the United Arab Emirates and CEO of the ADNOC said that India is on their agenda for expanding ‘strategic reserve’ and further discussions will take place with ‘counterparts in India’.  Kuwait is also exploring opportunities to invest in India’s refining sector. 

With the Gulf showing significant interest in India’s oil development, India plans to expand its refining capacity by 77 percent to about 8.8 million barrels per day by 2030 —  becoming a key market for South Asia’s oil investments.

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