India’s oil marketing companies, or OMCs, will prepare to increase their refining capacity to Rs 2.2 lakh crore before increasing fuel demand by 2030. A report by Crisil Ratings indicates that this investment will increase the installed capacity by 35–40 million metric tons. In contrast, the overall capacity will increase by nearly about 295 MT at the end of fiscal year 2030. The expansions come since OMCs are already running at full capacity and require additional infrastructure to beat up the surge in fuel consumption over the next six years.
The expansion will mainly be brownfield projects, which is an upgrade of extending the existing refineries. Brownfield projects are less risk-prone since they utilize existing structures and resources instead of greenfield expansion, which builds new refineries. Estimated capital expenditures in these brownfield expansions are ₹1.9 lakh crore and ₹2.2 lakh crore per year. It is a sizable number, indicative of the scope of potential growth in demand.
Moderating Growth in Fuel Demand
The report instead mentions that refinery capacity would continue to go up, but the general consumption of petroleum products would instead level off with increased fuel economy, rising percentages of cleaner fuel-running vehicles, and the ambitious Indian government target of 20% petrol with ethanol by 2026. Consumption growth will happen at a compound annual growth rate of 3% till 2030.
Transport fuels are the main area where slow growth is palpable, as demand for diesel and petrol would increase at more moderate rates. Diesel demand is anticipated to increase by only a CAGR of 2-2.5%, primarily due to the modal shift by electric and natural gas alternatives toward commercial vehicle usage. Commercial vehicles form 75% of diesel consumption in India, and this will be a crucial one that controls diesel demand.
The other consumable, petrol, is expected to increase more gradually, considering the share expected to be gained by electric two-wheelers. Presently, IC-based two-wheelers consume 75% of petrol, and it is expected to capture only a share of 12-15% for electric two-wheelers by fiscal 2030. This would drastically decrease petrol demand. Simultaneously, with passenger vehicles compressing natural gas (CNG), the market share is expected to capture 17–19% of the market share by 2030, which would reduce the consumption of petrol even further.
Naphtha Demand and Petrochemical Growth
While naphtha demand is expected to grow with a healthy CAGR of 6-7% over 2030, it would seem to contrast with the moderation seen in the consumption of diesel and petrol. This growth would primarily be courtesy of increased demands for petrochemicals, considering significant capacity expansions planned for the country. Since the overall petrochemical industry mostly depends on naphtha feedstocks, demand is likely to continue to hold up as most capacity expansions are forthcoming.
Becoming a part of refining businesses, integration of petrochemical operations will soon be one of the key strategies adopted by the OMCs. Petrochemical production will help OMCs diversify revenue streams and minimize transport fuels, as there is growing competition from these cleaner substitutes. This also opens a door for OMCs to cash in on the growing demand for end products like plastics, chemicals, and synthetic fibers, all of which require petrochemical inputs.
Basic Evaluation of Oil Refiners’ Financial Performance
Even though oil prices have, in recent times, been volatile, Indian oil refiners have ensured stable profit generation from operations. According to the report, during fiscal years 2016 to 2024, refiners maintained a rolling average return of $9-11 per barrel. Return on investment during the period under analysis was between 12 and 14% and, thus, demonstrates the strategic significance that the sector has towards the government. One of the surest ways of ensuring energy security for the country is through OMCs. Financial stability remains a key component for the organizations.
The comfort of financial resilience thus has allowed OMCs to go ahead with their intents of large expansion plans, but it would be noteworthy to remain prudent about the execution of such plans and the resulting capex productivity. Many Capex projects embody massive capital expenditures, and therefore, the quality of cost control, timely deliveries, and operational efficiency of the asset would ensure the successful completion of such projects for OMCs.
As the demand for fuel in India continues its evolution toward cleaner alternatives and more efficient consumption patterns, the OMCs continue to play a central role in fulfilling such a commitment. For example, the proposed ₹2.2 lakh crore investment in refining capacity up to 2030 is a reflection of that commitment to meet energy needs in line with adapting to changing market dynamics. Brownfield expansions and integration into petrochemicals are the main drivers of OMCs’ growth into a long-term trajectory, despite trends in fuel consumption gravitating towards cleaner energy solutions.
Source: BRSR
Credit: India’s oil marketing companies