Viewpoint: India eyes foreign upstream investment

India is increasingly relying on foreign companies to drive oil and gas output growth and create jobs, as domestic private-sector investment fails to pick up. But continued policy uncertainty over price reforms and taxes threatens to scare off some investors.

Discussions with foreign oil and gas firms are focusing mainly on downstream and storage investments. Interest has so far been limited to initial agreements, as bureaucracy and conflicts over land ownership hit progress. India, unlike its regional rival China, lacks the financial heft to build energy infrastructure using state funds.

State-owned Middle East oil companies have emerged in 2018 as the main prospective investors in the country's midstream and downstream oil sectors, while the majors have been drawn to retail developments and LNG terminals.

Saudi Aramco and Abu Dhabi's Adnoc have agreed to take a combined 50pc stake in the proposed 1.2mn b/d Ratnagiri refinery and 18mn t/yr petrochemical project in Maharashtra state — the biggest investment plans by any foreign oil company in India's downstream sector. Adnoc, Aramco and India's state-controlled IOC will each own 25pc of the $44bn Ratnagiri project, with fellow state-run domestic firms Bharat Petroleum (BPCL) and Hindustan Petroleum holding 12.5pc stakes.

But the project is delayed by three years from an original 2022 schedule because of delays in acquiring land. And the project's viability — already questionable given major expansions in refining capacity planned elsewhere in Asia-Pacific — could be undercut further by proposals by Russian state-run firm Rosneft's Nayara Energy, formerly Essar Oil, to double refinery capacity to 800,000 b/d and plans by private-sector Reliance Industries (RIL) to add 600,000 b/d of capacity at its 1.36mn b/d Jamnagar refining complex. Both Nayara and RIL are proposing expansions of existing capacity, which typically incur lower costs and can be pushed through more quickly as land is readily available, leaving it unclear whether there is room in the market for another major refinery such as Ratnagiri on India's west coast.

BPCL is also in talks with Kuwait's state-owned KPC over investing in a project to boost capacity at the Bina refinery to 310,000 b/d from 120,000 b/d. And Taiwan's state-controlled CPC proposes investing $6.6bn in crackers and downstream units on India's east coast, using feedstock from IOC's newest refinery, the 300,000 b/d Paradip plant.

Storage plans

India is also seeking $1.5bn of foreign investment to build storage caverns in Karnataka and Odisha states with a combined capacity of 48mn bl. The projects are part of the country's strategic petroleum reserves (SPR). Adnoc has filled half of the existing 11mn bl Mangalore SPR and is in talks to fill half of the 17mn bl Padur facility as well. But restrictions on domestic trade and export of the crude — with a large proportion to be earmarked exclusively for India's security requirements — has discouraged interest from other prospective investors such as trading firm Trafigura and bank Goldman Sachs.

Oil majors have shown more interest in retail outlets, given India's potentially huge demand. BP has secured licences to set up more than 3,000 service stations and is in talks with its upstream partner RIL on joint fuel retailing. Total has entered into an initial agreement with private-sector Adani to invest in Indian LNG terminals and set up 1,500 retail outlets, while Shell plans to expand its downstream presence more than tenfold to 1,500 outlets and Trafigura has applied for a retail licence on behalf of its Puma Energy affiliate.

Delhi has set up a committee to propose a new retail fuel policy, with recommendations expected by January.

Same old story?

But India's investment potential has long been heralded, only for the reality to fall well short of expectations.

Government interference in transport fuel pricing is creating uncertainty for investors. Delhi cut taxes on diesel and gasoline in October by 2.50 rupees/litre (3.4¢/l) but transferred a part of the fiscal burden — Rs1/l — to state-run oil marketers. A continuing tax dispute between UK upstream firm Cairn Energy and the government has also damaged the investment climate, with Delhi threatening to take recourse in Indian courts if it loses an international arbitration. Policy uncertainty may be aggravated by federal elections due by May 2019, with analysts expecting a coalition government.

The political uncertainty is clouding what should otherwise be an attractive investment destination. Overall oil product demand was 17.3mn t in November, down from 18mn t in October and from 17.6mn t in November last year. Diesel sales of 1.72mn b/d were lower by nearly 5pc from November 2017. Gasoline sales were 653,000 b/d, higher by nearly 9pc from November last year.