Need to expand India’s refining capacity

India is aiming to add 200 million tonnes (MT) of refining capacity, or around 4 million barrels a day, in the next 10 years to meet the growing demand for fuel. This is important for India’s energy security as India’s oil demand will double to 11.1 million barrels a day (550 MT) by 2045, according to OPEC’s World Oil Outlook. However, the achievement of target is facing challenges

Oil refining in India

Oil refining in India is a significant industry that plays a crucial role in meeting the country’s energy needs. India is one of the largest consumers of petroleum products in the world and imports more than 80% of its crude oil requirements. As a result, oil refining has become an important activity in the country.

India has several oil refineries, both public and private, located in different parts of the country. These refineries process crude oil and produce a variety of petroleum products such as petrol, diesel, aviation fuel, liquefied petroleum gas (LPG), kerosene, and others. The Indian oil refining industry has been growing steadily over the years, driven by the increasing demand for petroleum products.

The largest oil refinery in India is located in Jamnagar, Gujarat, and is owned by Reliance Industries. The refinery has a capacity of 1.24 million barrels per day and is one of the largest refineries in the world. Other major refineries in India include the Indian Oil Corporation refineries in Panipat, Gujarat, and Mathura, and the Bharat Petroleum Corporation refinery in Mumbai.

The Indian government has also taken several steps to encourage investment in the oil refining sector. The government has liberalized the sector, allowing private players to enter and operate in the market. It has also set up several Special Economic Zones (SEZs) to promote oil refining and attract foreign investment.

Challenges to addition of refining capacity

  • State-run refiners, which account for 65% of the domestic business, are proving slow to act, with IOC’s Paradip the last greenfield project to be commissioned in 2016 after a long delay.
  • Indian refiners need to add 20 MT of capacity per year to meet the target, but the growth in refining capacity has stalled, expanding by only 17 MT over the past five years, compared to 21 MT in the previous five years.
  • Over the next few years, only around 50 MT of capacity may come up with state-owned refiners sitting on decisions for the past six years to build new projects, despite government backing.
  • Exports leave India with less fuel for domestic use. Earnings from oil product exports accounted for 15% of India’s gross exports by value in April-January FY23. Reliance and Nayara account for the bulk of exports with state oil companies catering to the domestic market.
  • The upcoming capacity of 50 MT may yield only around 30 MT of fuels because around 25% of the capacity from new refineries will be dedicated to petrochemicals, and another 10% used to run the refinery, according to a former chairman of a state refiner.
  • State refiners slowed capacity addition fearing an exodus to EVs, yet EV sales next fiscal will trail state targets by half, according to a Business Standard report.
  • While the current impetus on decarbonisation is expected to cast a shadow over long-term consumption growth, a significant decline in consumption of petroleum products remains unlikely.

In order to solve the challenges, following measure can be suggested.

Measures Suggested

  • Encourage private investment: The government could create a more conducive environment for private companies to invest in the oil refining sector. This could include offering tax incentives, reducing regulatory hurdles, and simplifying the approval process for new projects.
  • Streamline decision-making: The government could work to streamline the decision-making process for state-owned refiners. This could help reduce delays and ensure that new projects are approved and completed more quickly.
  • Improve efficiency: The government could work with refiners to identify opportunities to improve efficiency and increase output from existing refineries. This could help address the current shortfall in refining capacity and reduce the need for new projects.
  • Increase exports: The government could encourage refiners to increase exports of refined petroleum products. This could help generate additional revenue to fund new projects and reduce the impact of lower domestic demand.
  • Develop alternative fuels: The government could invest in research and development of alternative fuels, such as biofuels or hydrogen. This could help reduce India’s dependence on fossil fuels and provide new opportunities for refiners to diversify their businesses.
  • Address the issue of petrochemicals: The government could work with refiners to address the issue of petrochemicals. This could include developing policies to incentivize investment in petrochemical production and reducing the amount of refining capacity dedicated to petrochemicals to free up more capacity for fuel production.
  • Focus on domestic demand: The government could prioritize meeting domestic demand for refined petroleum products over exports. This could help ensure that India has sufficient capacity to meet its growing energy needs and reduce dependence on imports.

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