Oil sector consolidation, clean fuel drive await India in 2020

  • Dec 03, 2019
  • Investing

India can expect a cocktail of initiatives aimed at boosting clean fuel use and gas price transparency, and consolidation in the state oil sector in the year ahead as New Delhi aims to strike a balance between fighting an environmental battle and preparing for robust growth in energy demand.

Although slowing economic growth has added to the headache for policymakers, analysts are hopeful those concerns won’t alter the government’s plans in moving ahead with introducing Euro 6 equivalent fuels, launching a gas exchange and selling a majority stake in one of the country’s leading state refiners, Bharat Petroleum Corp Ltd.

“India’s economy is expected to improve in 2020, with a string of reforms introduced by the government over the past few months,” said Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics. “The Reserve Bank of India has been regularly cutting interest rates to boost the economy, which should help to provide some support to oil demand.”

India’s oil demand is expected to grow by 120,000 b/d in 2019, its weakest pace of growth since 2013 and well below the average of 200,000 b/d seen over 2011-2018, according to Platts Analytics.

Demand has been dampened by an economic slowdown, coupled by flooding in some areas during the monsoon season and a slump in vehicle sales.

Although there will be some headwinds, Platts Analytics still expects India’s oil demand to grow by 170,000 b/d in 2020, outpacing the growth in 2019.

DOWN BUT NOT OUT

A slowdown in economic growth is increasingly taking a toll on India’s domestic consumption of diesel, which has witnessed negative year-on-year growth for several months, prompting refiners to search for buyers of their surplus cargoes in overseas markets.

Consumption of diesel rose only 1.8% year on year over January-September, data from the Petroleum Planning and Analysis Cell showed.

“Macroeconomic factors are weighing more on diesel as it is dependent on the manufacturing and industrial sector,” said Senthil Kumaran, consultant at Facts Global Energy. “Higher-than-normal monsoon rains in 2019 further exacerbated the situation. But we think the story for gasoil is not over yet. We expect a gradual recovery in diesel consumption in the next six months.”

“LPG should witness robust growth, while jet fuel will see a rebound as economic growth improves. FGE expects total oil products demand growth at 180,000 b/d in 2020,” Kumaran added.

Lim said the pressure to meet the International Maritime Organization’s 2020 clean shipping fuel deadline could push up energy costs. In addition, an expanding trade current account deficit could put pressure on the local currency and could potentially keep interest rates higher than desired.

“Motorists are also expected to pay a quality premium for their transport fuel with new Euro 6-equivalent fuel from April. In effect, Indian consumers will suffer from a double whammy of higher fuel prices, which could dampen oil demand, especially in H1 2020, before a potential improvement in H2,” Lim said.

STRATEGIC SALE, GAS PUSH

India’s cabinet earlier this year approved the sale of more than 53% stake in BPCL to a strategic buyer, which would gain access to management control, around 15,000 retail outlets and all of BPCL’s refineries except Numaligarh Refinery, which would be later sold to another state firm.

“The push by the government to divest state-owned assets and liberalize the fuel retailing sector should help to induce competition and will be beneficial for consumers,” Lim said.

To boost gas demand in the country, India has been stepping up efforts, but has a few hurdles to clear. The country needs to urgently address the issues of bringing gas under the goods and services tax to make it cost competitive, as well as introduce policies to encourage LNG consumption by the power sector, industry officials said.

New Delhi’s is aiming to boost the share of gas in its energy mix from nearly 6% currently to 15% by 2030, but analysts and industry officials say raising it to 8%-10% looks more achievable.

“India’s natural gas demand is expected to accelerate in 2020 after relatively steady growth over the past several years. Total gas demand is expected to grow more than 15% over 2019 levels,” said Jeff Moore, manager of Asian LNG Analytics at Platts.

Platts Analytics expects an anticipated rise in demand from industrial, residential and commercial sectors, coupled with low prices, will aid consumption growth.

West India DES spot LNG prices are expected to trade at a discount to Platts JKM index, which is forecast to fall to an historically low level in 2020. This could help spur additional demand for LNG, Moore said.

“However, downstream connectivity issues at existing LNG regasification facilities could limit growth. Also, any further delay in starting operations at new terminals could limit India’s ability to grow LNG imports in 2020,” he added.

Source: Platts