How India's oil sector pulled all stops to counter Covid-19 impact
From increasing strategic petroleum storage to better refinery utilisation, India's ability to swiftly adapt to sudden global challenges have largely helped the energy industry navigate safely despite the devastating impact of Covid-19.
On April 20, when US crude oil prices plunged below the zero-dollar mark into negative territory for the first time in history, it sent shockwaves around the global energy industry.
As stunned oil investors and countries watched, the West Texas Intermediate (WTI) crude futures plunged to -$37.63 a barrel - a dive or more than 305 per cent. The price plunge was quite inevitable in the aftermath of the near-decimation of the energy industry as the Coronavirus pandemic raged worldwide.
But for India, it was a blessing in disguise.
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India began buying from the spot crude oil market and topping up its strategic petroleum reserves (SPR) - a move that helped save the country an estimated $670 million in foreign exchange.
Swiftly mobilising its resources, India began buying from the spot crude oil market and topping up its strategic petroleum reserves (SPR) - a move that helped save the country an estimated $670 million in foreign exchange. “Taking advantage of low crude prices due to the Covid-19 situation, India filled its strategic reserves to full capacity,” the Indian Petroleum Ministry tweeted a few days after the historic crude oil price plunge.
According to the ministry, while 5.33 million tonnes of emergency storage - enough to meet India′s oil needs for 10 days - was built in underground rock caverns in Mangalore and Padur in Karnataka and Visakhapatnam in Andhra Pradesh by the government, state-owned oil firms were in April asked to further import oil when global rates fell to a two-decade low.
Expanding the SPR footprint
The move was in line with the Narendra Modi government's 2018 plan to build new caves of SPRs which, when complete and tanked up, will create additional capacity to maintain supplies for several days in an emergency and shore up India's insurance against any supply or price disruption. Following the execution of the plan, India's crude oil storage capacity is slated to equal 87 days of demand, which include 67 days' worth of commercial stocks held by refineries, apart from the armed forces' stocks.
India's crude oil storage capacity is slated to equal 87 days of demand, which include 67 days' worth of commercial stocks held by refineries, apart from the armed forces' stocks.
From Chandikhol in Odisha to Padur in Karnataka, apart from existing facilities in Visakhapatnam and Mangaluru, India's SPRs are an exemplar of the government's strategic footprint in the oil and energy sector that has helped it remain resilient to external shocks and challenges. And the onslaught of Covid-19 has made the benefits of pursuing such a strategy abundantly clear.
Whether it's the extra storage around the caverns of India or the rising refinery utilisation, India's ability to swiftly adapt to the changing circumstances and sudden global challenges have largely helped the energy industry navigate safely and raised glimmers of hope despite the devastating impact of Covid-19.
Refiners realign their models
The gradual appreciation of refinery utilisation - will enable refining companies to remain focused on key growth projects that would ensure India's long-term competitiveness to deliver strong future growth.
Even though the pandemic heavily impacted key end-user segments such as transportation and manufacturing sectors and significantly reduced the demand for fuel products in India, refiners were quick to re-align their operating models and supply chain cycles to ensure business continuity.
The gradual appreciation of refinery utilisation - one of the most critical and price-sensitive aspects of the energy industry in India - will thus enable refining companies to remain focused on key growth projects that would ensure India's long-term competitiveness to deliver strong future growth.
“Several Indian refineries have reduced their operating capacities while a few others have suspended operations to outlast the current crisis. Manali - a 211 thousand barrels per day refinery, operated by Chennai Petroleum Corp Ltd, has decreased runs by 40 per cent, as the demand for fuel products in India is yet to fully recover. Besides shutting down its smallest CDU, the Mangalore Refinery and Petrochemicals Limited (MRPL) has been running its other two CDUs at 50per cent due to lower products demand owing to COVID-19 impact,” said Haseeb Ahmed, oil and gas analyst at GlobalData.
Deploying divergent tactics
It is by deploying these divergent tactics that India - a relatively recent entrant to the strategic reserve club - is building its oil stocks and calibrating its refining resources to deal with potential fuel supply disruptions and price shocks.
While the Indian energy market has typically remained vulnerable to a combustible mix of growing demand, stagnating domestic production, soaring global crude costs and dependence on the unsteady West Asian region for imports, the country is all set to overtake China as the biggest source of growth for oil demand by 2024.
How the Indian energy sector handles the pandemic - which has flattened the energy industries of several countries - will therefore be a key factor in charting its future.
“Although the situation is gradually getting back to normalcy, demand for fuel such as diesel is not expected to gain a sudden surge as the heavy industries are coping with their recovery challenges. However, gasoline demand is likely to recover over the next two-three quarters as lockdown eases. The reduced non-essential travel and the increased usage of private transport are expected to dent the fuel demand in the medium-term,” said Ahmed of GlobalData.
Catalyst in transforming energy industry
Against such a backdrop, and coupled with the fact that India has some of the most aggressive renewable energy ambitions in the world - with social welfare central to many energy policies - the COVID-19 pandemic has proven to be a great catalyst to help transform and evolve India's energy industry.
Prime among them remains the oil & gas industry - which contributes to 5.2% of the global oil demand, is among the top three large markets in demand growth and fourth in the world in refining capacity with 249 MTPA. The sensitive and strategic nature of the industry can be fully grasped when considered against a global backdrop: India is very imports-dependent, with oil imports at 84% and gas imports at 53 per cent of their respective annual demands. Further, oil and gas imports constituted around 25 per cent of India's import bill in the fiscal year 2018-19.
With wide-spread demand destruction across the world and the downward spiral of crude prices, it's hardly a wonder that oil giants from Saudi Arabia, the UAE and beyond have made a beeline for India as the strategic safe haven for oil storage as well as investments in downstream industries.
Proficient in disaster response
“The Indian O&G industry is usually proficient at disaster response and its effectiveness has been demonstrated across a range of disaster scenarios in the past,” according to Ashwin Jacob, Partner, Deloitte India. “With COVID-19 too, the industry has done reasonably well thus far, as evinced by the near continuous operations and availability of different fuels, almost across the entire country.”
Further bolstering those responses is the intervention by the Indian government with major stimulus packages worth nearly $12 billion and proposals to revise core energy sector regulations, that come against the backdrop of Saudi Aramco's plan to buy a 20% stake in Reliance Industries Ltd.'s refining and petrochemicals business, valuing it at $75 billion.
As the above instances bear out, reliability in times of crisis is among the most treasured aspects of any energy industry - and India continues to demonstrate the opportunities and dependability of the sector even during the worst pandemic the world has seen in generations.