India’s oil marketing companies (OMCs) are expected to add 35-40 million tonne (MT) of crude oil refining capacity and take the installed base to ~295 MT by the end of fiscal 2030, to address the expected growth in consumption as the current capacities are already being optimally utilised.

That would require a capital expenditure (capex) of about Rs. 1.9-2.2 lakh crore, with most of the capacity additions being brownfield expansions.

Project risk in these investments is expected to be low, which coupled with the expectations of steady returns from the business will support credit risk profiles of OMCs.

In the decade through fiscal 2024, India’s refining capacity increased by 42 MT to 257 MT, primarily to cater to the growing domestic consumption, as exports remained rangebound at 60-65 MT over these years.

Domestic consumption of petroleum products logged a compound annual growth rate (CAGR) of 4% in the past decade. Transport fuels, accounting for ~56% of consumption, grew 4%1, while naphtha (~7% of consumption), grew 2%. The rest of the consumption pie, comprising liquefied petroleum gas and bitumen among others, cumulatively grew almost 4%.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “We expect overall petroleum product consumption to slightly moderate and register ~3% CAGR over the next six years, primarily due to slower growth of 2-3% in transport fuel consumption. This will be caused by improving fuel economy, rising share of vehicle sales with alternative cleaner fuels, and 20% ethanol blending target proposed by the Government of India.”

Amongst transport fuels, ~75% of diesel sale is linked to commercial vehicle usage in India, wherein a move towards electric vehicles or usage of natural gas by buses would lower diesel demand, thereby moderating growth to ~2-2.5% CAGR over the next six years.

For petrol, internal combustion engines (ICE) based two-wheelers account for ~75% of consumption in India, with the balance led by passenger vehicles. The rising share of electric two-wheeler sales (expected at 12-15% by fiscal 2030 from negligible levels currently) and compressed natural gas (CNG) passenger vehicle sales (expected to reach a share of 17-19% by fiscal 2030) will rein in petrol consumption. Blending ethanol with petrol will further reduce the petrol requirement as India aims to achieve a 20% blending target by 2026.

In contrast, naphtha demand will see a healthy CAGR of 6-7%, supported by increased demand from planned petrochemical capacity additions in India.

This growth in overall consumption will necessitate a 35-40 MT increase in refining capacity as the current capacities are already operating at the optimum utilisation level of ~100-103%.

Adds Joanne Gonsalves, Associate Director, CRISIL Ratings, “Most of the capacity addition would be brownfield expansions to cater to demand for end products, thus lowering the project risks. We have also seen the oil refiners balancing out their operating profits amid volatility seen in oil prices, wherein $9-11 per barrel of rolling average returns were earned between fiscals 2016-2024, recording a return on investments of 12-14%. Further, the sector benefits from its strategic importance to the government”. 

OMCs may also look to add further refining capacities to integrate with their petrochemical expansion plans, with a view to diversify business.