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Contours of Oil Refining Industry

Changing dynamics in the global oil market have put immense pressure. Bharat will need to stay firm and have comprehensive energy policy which it should keep tweaking depending on the situation. We must continue to focus on diversification of energy sources. — Vinod Johri


The oil refining industry is gaining one of the most vital factors in the growing economy on way to globally third biggest slot. The scope of this industry is gaining momentum to the extent of being the largest exporter of oil-based products after China which is considering slowing down the oil refining industry for certain reasons. Oil refining industry has issues of carbon emissions, the vital concern of COP28 besides dependency on crude oil imports.It is important to note that Bharat is one of the major exporters of refined products with a net export close to 1 million barrels per day (MMb/d) in 2022. To make Bharat a refinery hub, there is a need to secure long-term crude oil supply, given the domestic demand-supply mismatch. Speaking at the ‘Urja Sangam’ conference in March 2015, Hon’ble Prime Minister Shri Narendra Modi ji had urged all stakeholders to increase the domestic production of Oil and Gas to reduce import dependence from 77 % cent to 67 % by 2022, the 75th anniversary of our independence. He further said that import dependence should be brought down to 50 per cent by 2030. In fact, the target to reduce import dependence by 2023, has long been missed. Hon’ble Prime Minister Shri Narendra Modi ji declared investments of $67 Billion to improve the energy mix. 

On February 6, in his address at inauguration of Bharat Energy Week 2024, Hon’ble Prime Minister Shri Narendra Modi ji said “Additionally, we have solidified our position as one of the largest refiners globally, with our current refining capacity surpassing 254 Million Metric Tonnes per Annum (MMTPA). By 2030, we aim to elevate Bharat’s refining capacity to 450 MMTPA.”

Therefore, it is imperative to understand the policy concerns, oil pricing, Red sea menace of Houthy rebels, OPEC policy vicissitudes, manufacturing capacity, FDI and global scenario. We have to be careful and address the issues about Crude oil suppliers’ concerns about rupee settlement for cargos over repatriation of funds in preferred currency and high transaction costs on conversion of funds along with exchange fluctuation risks. 

Oil refining is an essential process for transforming crude oil into marketable products such as fuels, lubricants, and kerosene. A typical oil-refining process consists of several processing units such as distillation, cracking, coking, reforming, and post-treatment and refining of the products.By aiming to become a global refinery hub, Bharat can turn its disadvantage of inadequate oil and gas production into an advantage, with few countries planning greenfield refineries due to environmental concerns.The country’s refining capacity has increased from a modest 62 million tonne annually in 1998 to 254 MMTPA. Our refiners would add 56 MMTPA by 2028 to increase domestic capacity to 310 MMTPA.

Certain relevant statistics relating to our country, apprise us better about the crucial and key facts about the industry:

1.    Oil demand in Bharat is projected to register a 2X growth to reach 11 million barrels per day by 2045.

2.    Diesel demand is expected to double to 163 MT by 2029-30, with diesel and gasoline covering 58% of our oil demand by 2045.

3.    Consumption of natural gas is expected to grow by 25 billion cubic metres (BCM), registering an average annual growth of 9% until 2024. 

4.    In February 2023, our oil demand rose to a 24-year high, which resulted due to a boost in the industrial activity. It was the 15th consecutive year-on-year rise in demand.

5.    Consumption of natural gas is expected to grow by 25 BCM, In February 2023, our oil demand rose to a 24-year high, which resulted due to a boost in the industrial activity. It was the 15th consecutive year-on-year rise in demand. Registering an average annual growth of 9% until 2024.

6.    Bharat imported 21.4 million tonnes (mt) crude oil in January 2024, the highest in last 20 months to meet domestic consumption and take advantage of rising demand for refined products in export markets.

7.    Bharat aims to commercialise 50% of its SPR (strategic petroleum reserves) to raise funds and build additional storage tanks to offset high oil prices. 

8.    In May 2022, ONGC announced plans to invest US$ 4 billion from FY22-25 to increase its exploration efforts. 

9.    The Government has allowed 100% Foreign Direct Investment (FDI) in upstream and private sector refining projects.

10.    In July 2021, the Department for Promotion of Industry and Internal Trade (DPIIT) approved an order allowing 100% foreign direct investments (FDIs) under automatic route for oil and gas PSUs.

11.    In Union Budget 2022-23, the customs duty on certain critical chemicals such as methanol, acetic acid and heavy feed stocks for petroleum refining were reduced. 

12.    In September 2021, Bharat and the US had agreed to expand their energy collaboration by focusing on emerging fuels. Op

13.    Petroleum trade with Europe added $40 billion to exports. Bharat’s petroleum products exports were $94.5 billion in FY 23, up from $25.8 Billion in 2020-21.

According to the Petroleum Planning and Analysis Cell (PPAC), Bharat’s imports last month were the highest since April 2022, when the world’s third largest crude oil importer bought 21.6 MT of the critical commodity, which accounts for more than 85 per cent of its domestic requirement.  According to S&P Global Commodity Insights, our oil products demand increased 398,000 barrels a day, or 8.2 per cent, year-on-year and 8,000 barrels a day month-on-month in January (2024) on the back of higher consumption of all products except fuel oil. Bharat usually purchases crude oil from Middle East countries through term contracts and with Russia through the spot market. For the oil PSUs, the spot market offers opportunities to buy competitively priced crudes and explore new crude oil grades from diverse geographies. 

Ourgovernmentis keen on making Bharat a refinery hubfor theapparent reason that western countries may not increase refining capacity due to climate pressure, so we can tap this opportunity to supply to them.According to Ellen R. Wald, President of Transversal Consulting and author of “Saudi, Inc.”, “China pursued this strategy and it worked well for them. They have many independent refineries that export refined products across Asia. Bharat is in a good position because it can import Russian crude oil, refine it into products and sell those products to Western European consumers who cannot buy Russian refined products due to sanctions.”Those in refinery business see it as a balance between import and export of crude oil and petroleum products. Though major global refiners are currently not spending much in new projects and older refineries having almost lived their lives, Bharat can become a supplier to the world. Basically, the balance of payment will be in our favour.  

Bharat is one of the major economies in the world where total oil demand is expected to grow through 2045. The refined products demand is expected to grow from 5.4 million barrels per day (MMb/d) in 2022 to about 8.1 MMb/d in 2045 (i.e., an increase of about 50 per cent), almost reaching the peak demand.In comparison, the demand growth in China and the world is likely to peak in this decade and is expected to decline by about 18 per cent and 8 per cent respectively, by 2045 from their peak demand. So, it is imperative that Bharat needs to add refining capacity to meet the domestic oil demand.

Since greenfield refineries need long gestation period, the banks/FIs should extend loans for them. It is correct that Bharat’s import dependency for crude oil has been growing with the decline in domestic production and refinery capacity additions. It has increased from around 80 percent in 2010 to around 90 percent in 2022 and is expected to increase further.

It is expectedthat the net exports of refined products may reduce over a period owing to a decline in demand in the other parts of the world, particularly the matured economies, and difficulty in justifying new refining capacity additions in a world where demand is declining from the later part of this decade.Higher import dependency is definitely posing energy security challenges, however, some of that is driven by the domestic demand growth. 

CO2 emissions in Oil refining

Emission Source           Description                                                 Share of CO2           CO2 Concentration in Off- 
                                                                                                     Emissions (%)                 Gas Flow (Vol. %)

Process furnaces         Combustion of fossil fuels for heat                      30–60                               8–10
                                  generation for distillation columns & reactors

Steam generators        Combustion of fossil fuels to generate                 20–50                               4–15
                                  process steam

Catalytic crackers        Burn-up of petroleum coke                                20–50                               10–20

Hydrogen                     Reforming of hydrocarbons to                             5–20                                20–99
                                  H2 and CO2 production

Environmental Concerns

The operation of these processes requires large amounts of thermal energy and results in the release of significant amounts of CO2 from different sources in the refinery, as shown in Table below.

In general, petroleum refineries generate about 1 billion tons of CO2 annually, which represents around 4% of global CO2 emissions. Depending on the complexity of the refinery, around 1.5%–8% of the fuel is used in the refining process. A typical refinery generates about 0.8–4.2 million tons of CO2 per year.

Several strategies could be employed to reduce CO2 emissions by the oil-refining process; the most economical way is to reduce energy consumption. However, the nature of the refining processes implies that a refinery will still consume a substantial amount of energy, which in turn would result in the production of a considerable amount of CO2 emissions. 

Our options

The obvious option is to revive domestic oil production, use of biofuels, and EV focus, while improving strategic relationships with the major oil producers, and developing strategic storage. We should remember that Biofuel alliance will generate $500 billion economic opportunities. 

If new refining capacity additions are focused on export markets, that may not help the situation and further challenge the net zero ambitions. If we look at China, the country has restricted refined product exports and is managing the refinery capacity additions to address the energy security concerns and net zero ambitions. The country has developed a large strategic and commercial crude oil inventory as well to address the geopolitical challenges.

But Bharat cannot follow China’s path, given its growth, jobs and fiscal pressures. The way out for Bharat is to strike a balance between its diplomatic positioning and economic interests, while looking at all sources of energy generation. There has to be a consistent long-term strategy. It has to be understood that a consumer like Bharat cannot risk global shifts that happen in the oil market which bring in a major element of uncertainty and unpredictability. Changing dynamics in the global oil market have put immense pressure. Bharat will need to stay firm and have comprehensive energy policy which it should keep tweaking depending on the situation. We must continue to focus on diversification of energy sources.  

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