Made in India
Plans to increase the manufacturing base and sustain high GDP growth will underpin rising oil demand and imports
They can sell for as little as 49,700 rupees ($750), yet India's scooters, mopeds and motorbikes have become an unlikely barometer of global oil demand. And, according to the latest data, a 6.1% fall in the volume of sales of these two-wheelers led in January to a 2.5% fall in the country's domestic oil demand, the biggest drop in a decade.
The unlikely culprit for this interruption in India's growing appetite for crude imports in 2017 is the lingering effect of the demonetisation that prime minister Narendra Modi introduced last November: the removal from circulation of some banknotes, designed to curb corruption, created a dearth of cash, mainly in rural areas. As Facts Global Energy (FGE) reported in late February, most two-wheelers are bought for cash while cars are mostly financed through bank loans.
By far India's most popular form of transport, two-wheelers account for four out of every five vehicle sales. And when their sales crashed, gasoline usage dipped.
However, useful indicator though it is, the number of new scooters on India's roads will likely become a less important factor in its unquenchable thirst for crude during 2017. More profound influences on demand are expected to be a manufacturing boom under the "Make in India" initiative, a flood of foreign-direct investment under more relaxed terms, a long-term switch to cleaner-burning fuel, and rapidly growing storage capacity for crude.
To take just Make in India as an example, prime minister Modi wants the country's share of manufacturing to grow from 15% of GDP to 22% by 2022. It's become a game-changer for crude imports and is one of the reasons why the Ministry of Petroleum and Natural Gas reversed earlier forecasts and now predicts substantial growth for naphtha and fuel oil, with the latter set to increase by double figures.
The effects of FDI are expected to show up throughout 2017. Among other majors taking advantage of the new rules that permit 100% investment in energy projects, Shell plans further capex in the upstream and downstream on top of the $1bn it recently invested.
A bull's market
Nearly everybody's bullish on Indian oil demand. As Lorenzo Simonelli, boss of GE's oil and gas business, predicted in January: "India is expected to be one of the largest contributors to non-OECD petroleum consumption growth globally," citing a 9.1% year-on-year increase in crude oil imports to 18.81m tonnes (about 4.5m barrels a day) last August as a benchmark for the future. Looking further ahead, Simonelli expects total fuel consumption to grow by 5-6% in the 2016-17 financial year. Over the medium term, GE's figures suggest consumption will expand by 9-10%.
Based on India's ambitions in manufacturing, Platts Analytics broadly agrees: "Gains in oil demand from the Make in India initiative will more than offset the negative effects of demonetisation." Citing several factors including the drive for clean fuel (India is aiming for Euro VI standards by early 2020), mounting demand for air travel and ground transport, and the "insatiable growth for petrochemicals", Platts sees a long-running demand for gasoline, jet fuel, LPG and naphtha.
"For the third year in a row, India's growth in oil demand will outpace China's [in 2017]," the consultants said in a note. They predict demand of 4.13m b/d in 2017, up 7% on 2016.
10% rise in Indian oil imports in 2016
Such numbers jeopardise Modi's long-term strategy to reduce crude imports. He's aiming for a 10% reduction by 2022 compared with current levels. For comparison, the latest figures show India imported 197.5m tonnes—4.33m b/d—of crude in the first 11 months of 2016.
But petroleum minister Dharmendra Pradhan has a five-point plan to cut imports that includes heavy investment in the country's refineries. For instance, India Oil, the country's biggest refiner, plans to spend $7.3bn between now and 2022 to boost its refining capacity to 2.08m b/d, up by about 30%.
Still, the numbers continue to head in the wrong direction. In 2016, imports rose by more than 10% and, although refinery throughput improved by 7.4% to 4.88m b/d, there's a long way to go before the refineries take up the slack.
There's also a lot of tank capacity to fill up as India aims to triple its strategic oil reserve in the next five years. With the construction now complete of three facilities in the south, Pradhan has announced a $2bn plan to build two larger facilities with a combined capacity of about 10m tonnes.
Meanwhile, even sales of two-wheelers are expected to rebound as the impact of demonetisation fades. Even with the hit, they still grew by 8.3% between April and January, according to the Society of Indian Automotive Manufacturers. And over the same period sales of passenger vehicles increased by nearly 10%. Most researchers predict a similar trajectory in 2017. FGE estimates that gasoline demand should grow by 10.5% through the second and third quarters of 2017 compared with 2016. There's no sign that India's thirst for crude will be slaked for years to come.