By R. Sasankan

There is a popular truism that says economic growth is impossible without a concomitant increase in energy consumption. India is now rated as the fastest growing economy in the world and the top international energy institutions such as the International Energy Agency (IEA), OPEC and BP have tagged India as the demand driver for crude oil all the way up to 2040. The industrialised west is moving rapidly towards electric vehicles and India has a target to achieve it in phases. India is also striving to attain a 15 per cent share for natural gas in its energy mix.

The IEA estimates that oil demand in India will increase more than four times by 2040. The BP report estimates India’s crude oil demand to reach 485 million tons oil equivalent (mtoe) by 2040 from 212 mtoe in 2016. The OPEC report estimates India’s oil demand to reach 9.9 thousand barrels of oil equivalent per day (mboed) in 2040 from 3.9 mboed in 2015. These top energy pundits are, thus, unanimous about India’s future oil demand. At present, imported crudes account for 83 per cent of the total crudes processed in Indian refineries.

It is natural for politicians – worried as they are about the growing unemployment in the country – to leap at the idea of setting up refining capacity at home to meet the projected demand growth. India’s total refining capacity today is 252 million tons per annum and it is ranked as Asia’s largest exporter of petroleum products. The Chennai-based, CPCL has already decided to set up a new 10 million ton refinery. Kochi Refinery of BPCL has just completed its expansion and Numaligarh refinery’s capacity expansion has already been approved. The idea of a mega refinery in Maharashtra was also inspired by the demand projections made by these international energy organisations.

But the question remains: does it make economic sense for a crude oil importer to be a petroleum product exporter? What advantage does an Indian oil refiner have to enable it to compete with, say, a refiner in the US, Russia or the Middle East and sell petroleum products competitively in the global markets? This may sound like heresy but it isn’t. Even within the government there are some genuine energy pundits who opposed the idea of creating fresh refining capacity for export as it tantamount to subsidising the overseas consumers.

The resistance within the Indian government to the idea of creating refining capacity designed to export petroleum products like petrol and diesel dates back to 2003. The main reason is that India, as a net importer of crude oil, has no marginal advantage in the export of petroleum products for the automotive sector. Refining margins are rarely that lucrative to compensate for double handling costs associated with the import of crude and the export of petro products. Moreover, the Indian port infrastructure, which is not the most efficient in the world, inflates handling costs.

Refineries are capital intensive projects and the cost of capital is high in India. India has no technology advantage either since it acquires technology and even outsources engineering and design services to external consultants. The principle of eminent domain – whereby the government acquires land for a public good – does not work well because the country does not have adequate land in desired locations to house large industrial projects, given the fact that it usually involves large-scale displacement of people.

Indian manpower costs also do not offer a great advantage: a typical refinery in India employs two and a half times the number of people compared with a refinery of the same size overseas. In any event, manpower costs are no more than 2-3% of the total cost of refined products. So, the obvious question to ask is: how are Indian refiners able to compete in the market for petro products when they have no apparent advantage in refining crude?

And here is the paradox: how is it that India’s single largest export is petroleum products? The answer is obvious. Indian oil refineries are given huge subsidies by way of land, tax holidays for direct and indirect taxes, lax environmental enforcement, export incentives and, above all, a monopolistic domestic market devoid of any competition that is willing to absorb the cost burden that exports involve.

The issue, say energy experts, is further complicated by developing combined refinery and petrochemical facilities. Petrochemical plants can be built without creating surplus capacity for petroleum products. Petrochemical capacity can also be created through far more competitive import of the intermediate products that the oil refinery feeds to the petrochemical complex. Instead, because of a non-competitive and protected petrochemical industry in the country, India uses the petrochemical complexes to subsidize the export of petroleum products. The Indian consumer ultimately pays for this as well.

One question remains: how did RIL achieve success in refining by operating the world’s largest refinery complex at a single location? RIL managed this process brilliantly. It got land practically free and the state government was happy to provide the required support infrastructure. The duty on imports was waived in the same week that its plant received its clearances. It received a 20-year tax holiday from the state government, a benefit that was transferable in those days. Initially, RIL was selling product to IOC at import parity prices (that included freight and custom duty elements) while also enjoying deemed export benefits for many years.

The upshot of all this is that the Indian tax payer and the Indian consumer of petroleum products have been subsidizing the export of petroleum products. That begs the question: why do we need to create refining capacity that exceeds India’s own needs?