Although India’s per capita income is low at US$ 3100, the economy is huge at US$ 3.56 trillion in purchasing power parity terms. GDP growth rates were estimated at 9% in 2007, 7.4% in 2008, and 6.5% in 2009. Given the poor health of the global economy, the slow down in India has been quite modest, and this has been attributed in part to the growth of the domestic market. Indian consumers purchasing Indian goods and services have partially shielded the country’s economy from woes in foreign markets. The service sector has grown in importance. The breakdown of Indian GDP is estimated at 54.9% service sector, 28.2% industrial sector, and 17.0% from agriculture.
Although agriculture contributes only 17% to GDP, slightly over one half of the population is agrarian. The Indian government has long been concerned about the gap between rich and poor, urban and rural, and the issues of social equity. These concerns have directly influenced India’s energy policy and pricing, as the author discusses in greater detail in this article. The oil and energy sector in India is a critical industry with a wealth of resources on the upstream side, a refining industry that has skyrocketed in size and capability, a huge domestic market with rising demand for higher quality fuels, and an active role as an oil trader. Yet it also is highly regulated and is in the midst of a difficult process of reform and liberalisation.
Indian hydrocarbon resources and supply/demand
India’s upstream hydrocarbon industry is active and extensive, yet fossil energy reserves and production fall far short of demand. India contains 13.8% of Asia’s total proved oil reserves. India’s natural gas reserves are estimated at 1.09 trillion m3, with an R/P ratio of 35.6 years. India accounts for only 7.1% of Asia’s natural gas resource.
India’s recent crude oil production has focused on offshore fields. According to the Ministry of Petroleum and Natural Gas, onshore production of approximately 11.8 million t during the 1990s fell to approximately 11.2 million t in the 2008 - 2009 fiscal year. Offshore crudes account for approximately two thirds of Indian output, which averaged 33.5 million t (approximately 670 000 bpd) during the 2008 - 2009 fiscal year.
In terms of total demand, domestic output falls well below India’s demand.
Indian oil product markets and pricing issues
India’s oil and oil product pricing system is highly complex, and the process of oil market liberalisation has been a long and difficult one. The recently announced (June 2010) price decontrols on Indian oil products have been a sensational news item, and already these price hikes have sparked public protest.
With a history of price controls and cross subsidisation, it is not surprising to see a demand pattern weighted toward middle distillates in India. In fiscal year 2008 - 2009, the market size was 2.876 million bpd, nearly 48% of which was middle distillates.
The expansion of the Indian refining industry has necessitated an increase in crude imports, and it has also stimulated trade in refined products.
Indian oil refining industry
After India’s initial push into refining in the 1960s and 1970s, the world refining industry entered into a period of overcapacity. Indian capacity survived, however, and domestic oil demand began to grow swiftly by the latter half of the 1980s. More refinery investments followed. By the mid 1990s, India had committed itself to becoming a major centre of refining. By the year 2008, Indian capacity was approximately 13 times its 1965 level, while global capacity was only approximately 2.6 times its original level.
India’s energy markets remain dependent on fossil energy, and despite respectable reserves of coal, oil, and natural gas, production of all of these fall short of demand, and imports are rising. The government has attempted to develop the energy sector in ways that benefit the local populace, and it has adopted complicated pricing systems to shield segments of the population from price spikes in the international market. The costs of such strategies have been high, though it can be argued that the socioeconomic benefits have been worthwhile. It may be easy in hindsight to note flaws in the development of India’s oil market regulation and price controls, but India was not unique in viewing oil as a strategic commodity and deciding to place much of the business squarely in government hands. The government maintains a strong regulatory presence in the energy markets, yet it has pursued a gradual course of privatisation and liberalisation. The market has grown around the pricing system, however, and therefore each step toward a fully open market is a difficult one. The current round of price increases is modest by international standards, yet these price hikes affect a large and growing population already feeling the effects of inflation and poor global economic health.
The Indian refining sector has expanded massively, reaching 3.4 million bpd with the commissioning of the second Reliance Industries Ltd, plant at Jamnagar. This complex is now the world’s largest, with a total crude capacity of 1.24 million bpd. Expansions and upgrades have been successfully completed across the country, and additional projects are planned. The sophistication and capability of the industry also is evident in the high rates of capacity utilisation, in FY 2008 - 2009, crude runs were 3.06 million bpd, equating to a utilisation rate of 108% relative to nameplate crude capacity of 2.829 million bpd. The new Reliance Industries refinery is not included in this figure, but during its first year of operation (2009), it was successfully tested at 120% of its design capacity as well. Access to its huge and growing domestic market assures the future of the refining sector, but as foreign markets recover and demand begins to grow, India is also capable of additional growth in its role as product trader and export refining centre.
Nancy Yamaguchi, August issue of Hydrocarbon Engineering
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