As Electrification Churns India's Energy Mix, Uncertainty Hangs over Petroleum Refining Sector

If 'e-mobility' takes off in a big way, it could adversely affect the demand for petrol and diesel in domestic as well as in overseas markets, potentially upending the calculations of India's refiners.

A view of Bharat Petroleum Corporation Ltd refinery is seen in Mumbai April 24, 2008. Credit: Reuters/Punit Paranjpe/Files

A view of Bharat Petroleum Corporation Ltd refinery is seen in Mumbai April 24, 2008. Credit: Reuters/Punit Paranjpe/Files

New Delhi: As the ministries of road transport and railways plan to phase out the use of petrol and diesel over next 5-13 years and gradually shift toward exclusively using electricity as fuel, uncertainty hangs over the future of India’s booming petroleum refining sector.

While the national transporter plans to complete electrification of all rail tracks by 2020-21, the road transport ministry is steering a policy to prohibit the sale of petrol and diesel-run vehicles by 2030.

The railways expects to save Rs 10,000-11,000 crore annually by phasing out the use of diesel as fuel, and hence the urgency to electrify rail tracks.

“We are giving a re-look to the ways of speeding up the electrification process of rail lines across the country. The cost on account of power is quite less and so we can do a lot of savings in that,” railway minister Piyush Goyal said recently.

Road transport minister Nitin Gadkari too looks determined to phase out fossil fuel-run vehicles. Gadkari has emphatically stated that India will have 100% electric vehicles latest by 2030, though he hopes the country will attain the target before that.

State-owned Energy Efficiency Services Ltd (EESL) has recently given orders for supply of 10,000 electric cars to Tata Motors and Mahindra and Mahindra. Now it plans to float another tender for supply of a similar number.

“We will come up with another tender for similar number of electric vehicles. Basic specifications for those electric vehicles will remain the same,” Saurabh Kumar, managing director, EESL, said recently.

These cars will be used by central government ministries and departments, and spur installation of electric charging stations.

Segment-wise breakup of diesel consumption in transport sector

Segments % share in total diesel usage
Private cars, SUVs 13.15
Commercial cars &UVs 8.94
3-wheelers 6.39
Trucks 28.25
Buses 9.55
Railways 3.24

Source: 2014 PPAC survey on sale of diesel, petrol

Impact on refiners

The moves by the railways and road transport ministries do not augur well for the future of the country’s thriving petroleum refining industry.

India has 230 million tonne per annum (mtpa)-refining capacity, which it plans to double by 2040 to meet the projected domestic fuel demand growth and also to tap the lucrative export market. The project is estimated to cost Rs 2.70 lakh crore.

According to energy experts, the major drivers for India’s fuel demand growth will be the continued robust sales of passenger vehicles, substitution of liquefied petroleum gas (LPG) as a cooking fuel, growing urbanisation and the country’s demand for infrastructure and consumer goods.

Refineries set up by private players like RIL and Essar are designed primarily to cater to the overseas market, though some portion also goes into the domestic market too. While private refineries are focusing on the export market, those in the public sector basically cater to domestic consumers.

The three state-owned oil refiners – Indian Oil, Bharat Petroleum and Hindustan Petroleum – are together building a 60 mtpa-capacity refinery on the Maharashtra west coast to benefit from the sustained growth projected in India’s long-term fuel consumption.

However, if e-mobility takes off in a big way, it could adversely affect the demand for petrol and diesel in India as well as in the overseas markets, potentially upending refiners’ calculations, say analysts.

Segment-wise petrol consumption

Segment % share in petrol consumption
2-wheelers 61.42
Cars 34.33
3-wheelers 2.34

Source: 2014 PPAC survey on sale of diesel, petrol

An informal group of ministers has already submitted its suggestions to cabinet secretary P.K. Sinha and an electric vehicle policy is expected to be in place before the end of this month, which would potentially mark the countdown to the eventual phase-out of fossil fuel-run passenger vehicles.

State governments too are moving fast to tap growth opportunities in the sunrise sector. Karnataka has put in place an e-vehicle policy, ahead of the Centre. Maharashtra too has issued a draft policy which is likely to be approved soon.

“We want to make Karnataka the electric vehicle capital of India. We will tap the available opportunity and allow the electric vehicle sector to bloom in the state,“ industries minister R.V. Deshpande said after the state cabinet approved the policy in September this year.

Maharashtra envisages manufacturing about one lakh electric vehicles per annum over the next three to five years. The state’s draft policy aims to encourage the use of electric vehicles for public transport as well. The state is planning a pilot scheme to test electric buses in Mumbai, Pune, Nagpur, Thane and Nashik.

The Maharashtra government wants electric vehicles to become 5% of the total public transport in the next three to five years, sources said. Other states might also come out their e-mobility policy soon.

Also read: The False Burden of Social Cost on Renewable Energy

As per a study conducted by market research firm Nielsen in 2014 across India at the behest of the petroleum planning and analysis cell (PPAC), about 70% of diesel and 99.6% of petrol is consumed by the transportation sector.

When the envisaged 100% e-mobility becomes a reality (it is targeted by 2030 but there is a strong possibility that it may happen even before that, given rapid advances in energy storage technology), nearly 40% demand for diesel and almost 100% for petrol will be wiped out. This could well prove an underestimate given that it is based on the assumption that trucks will continue to run on diesel.

Tesla has just unveiled a testing prototype of an all-electric heavy-duty truck called Tesla Semi. Not just Tesla, Bosch, Cummins, Daimler and Siemens too are working to develop electric cars. Besides, there are startups like Chanje, Nikola and Wrightspeed which are chasing a similar dream.

It is true that oil refineries have the flexibility to change their product portfolio, depending on the degree of complexity. They can reduce production of petrol and diesel and increase output of jet fuel, LPG, naphtha and heavy fuel oil.

However, the quest for emission-free clean fuel is not limited to road transport and railways. For example, a solar-powered aeroplane has already completed a round of the world, marking a watershed development in the history of energy history. Meanwhile, Rolls Royce, Siemens and Airbus are working on a hybrid electric aircraft that could fly as early as 2020. So uncertainty hangs over the future demand of aviation turbine fuel.

The idea of replacing dirty heavy fuel oil with LNG is already gaining traction in the shipping industry as the sector faces pressure to reduce greenhouse gas (GHG) emissions. The industry contributes nearly 3% of total global GHG emissions.

Naphtha, produced during processing of crude oil, has uses in industries, ranging from fertiliser to petrochemicals. But India already has excess production of naphtha and refiners critically depend on exports to dispose of surplus fuel.

Meanwhile, it is getting tough competition from ethane. India’s biggest private sector refiner RIL is likely to export additional 500,000 tonne of naphtha in 2017-18 as it has switched to use of ethane at its petrochemcial plants.

There is little chance of naphtha demand reviving in the fertiliser sector with most of naphtha-based urea plants already converted for use of natural gas and LNG as fuel. There is not much demand for naphtha as fuel in power generation either. Kerosene, another byproduct of crude oil distillation, is mostly used for lighting in rural India. Its demand has been falling with the increasing electrification of villages.

LPG, another product derived from crude distillation, is being replaced by piped natural gas in urban areas as city gas distribution spreads its wings. While rural LPG connections have significantly increased after implementation of the Ujjwala scheme, LPG consumption has not grown commensurately.

Out of 32.2 million new LPG connections issued in 2016-17, 20 million were given to Ujjwala beneficiaries. While the number of LPG consumers grew by 16.2% in 2016-17, consumption grew by just 9.8%, up from 9% in 2015-16. The mismatch shows that consumers are not going for refills, said analysts.

According to global consultancy firm McKinsey, electrification – an attractive solution to growing levels of vehicle pollution in metropolises – is of particular importance to India today. The automotive industry is already feeling the effects of electrification or e-mobility, both globally and in India.

“By 2030, electrification could lead to electric vehicles (EVs including battery electric vehicles, plug-in hybrid electric vehicles, and hybrid electric vehicles) holding a substantial share (up to 50% of new vehicle sales in a breakthrough scenario) of the global automobile sector. If India sees a similar momentum, it will significantly impact manufacturers across the automotive value chain,” McKinsey said in a recent report titled ‘The Future of Mobility in India: Challenges and Opportunities for Auto Component Industry’.

Because of its gargantuan size, the Maharashtra coastal refinery project was seen as too risky to be implemented by one refiner. As a result, the ministry had to rope in all three state-owned refiners – Indian Oil, Bharat Petroleum and Hindustan Petroleum – to distribute the risk.

It is surprising that despite so many risks to long-term oil demand, the petroleum ministry is zealously supporting the proposed refinery on the Maharashtra coast. But the bet could go wrong, leaving state-owned refiners’ balance sheets burdened with dud assets.

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